What are Rolling Returns of Mutual Funds and How to Check?
12 September 2024
8 min read
00:00 / 00:00
Investors always look for returns while making an investment avenue. Various types of returns are calculated based on different intentions. One of such returns is rolling returns which has become a relevant topic in the field of mutual funds as they help investor know about their returns in different time period. So it is important to understand how it works.
In this article, we will explore rolling returns meaning, how to calculate rolling returns, advantages and disadvantages, and many more.
What is Rolling Returns in Mutual Funds?
Also known as ‘rolling time periods’ and ‘rolling period returns’ refers to the annualized average returns of investment on multiple intervals within a specific period. This rolling return helps investors know how the fund performed in different intervals out of the overall investment period
When it comes to mutual fund investment, rolling returns are one of the significant factors to consider as it depicts an overall view of the mutual fund’s performance over varied time periods. It allows investors to gain valuable insights into the historical performance of the fund.
How to Check Rolling Returns of Mutual Funds?
Collect Fund Info: Visit the official website of the mutual fund, or check other financial websites like Rupeezy for the fund's data performance of the funds.
Identify Historical Data: Find the historical performance data for the mutual fund, as this could fall under the specialty menu titled, "Performance" or, "Historical Returns."
Determine Rolling Period: Determine the rolling period you would like to observe (i.e. rolling returns over the last 1 year, 3 years, or 5 years).
Collect Data: For calculating mutual funds' rolling returns, one must collect necessary data such as the historical Net asset value of the fund over the desired time frame
Calculate Rolling Returns: ?You can use a spreadsheet or financial program to calculate rolling returns (average returns) for you.
Financial tools: Some financial websites or online brokers have calculators for rolling returns, and they provide the results if you enter the relevant data. It is much easier than calculating in a spreadsheet.
Review Fund Reports: After assessing the rolling returns, Compare them with other funds, and review the fund reports for informed decision-making that aligns with your financial goal.
Read our latest blogs “Types of Mutual Funds”, “Open Ended Mutual Fund” and “XIRR in Mutual Funds” to learn more about mutual funds!
Calculations of Mutual Fund Rolling Returns with Example
The example below will help you understand rolling returns in detail.
Let's say you have an investment in a fund for 6 years and the annual return for each year is as follows:
Time period | Annual returns |
Year 1 | 6% |
Year 2 | 8% |
Year 3 | 10% |
Year 4 | 4% |
Year 5 | 12% |
Year 6 | 7% |
Here, you want to analyze how the fund has performed in every 3-year interval during the 6 years.
In 6 years, we will get 4 rolling intervals for which you first need to calculate the average returns:
First interval (Years 1-3): (5+8+10) / 3 = 8%
Second interval (years 2-4): (8+10+4) / 3 = 7.33%
Third interval (years 3-5): (10+4+12) / 3 = 8.66%
Fourth interval (years 4-6): (4+12+7) / 3 = 7.66%
Now that you have calculated the average returns for each interval, you need to calculate the average of these averages in order to arrive at the rolling return:
(8+7.33+8.66+7.66) / 4 = 7.91%
Thus, the 7.91% rolling return reflects the average performance an investor could expect if they invested for 3 years at any point during the 6-year period. It's a good way to assess consistency over time rather than focusing on single-year returns.
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Importance of Rolling Returns of Mutual Funds
Dynamic Performance Assessment: As Rolling returns calculate the returns of a particular fund considering the time intervals during a given time frame. It allows investors to analyze both the fund's average return and the stability and variability of returns over a fixed period and performance in varied market situations.
Consistency and Reliability: It will help identify funds that continuously generate positive returns and allow an investor to invest in reliable investments. The greater the time period that is considered to calculate the rolling return, the more reliable the outcome will be.
Risk Assessment: It facilitates the assessment of risk for investors. Any former investor can recognize that a fund with lower variability in rolling returns may convey a lesser risk for the investor, and likely align itself with the more conservative investor in future scenarios.
Market Cycle Insights: The rolling return measure can show how a fund responds in financial markets during different market cycles. Understanding how a fund performs during bullish and bearish cycles can lead to useful information regarding the future performance of the fund.
Comparative Analysis: The rolling return measure allows side-by-side analysis comparisons between many funds to determine which funds have sustained a better performance over pre-assigned timeframes and many financial environments which ultimately helps with informed decision-making.
Applications Rolling Returns of Mutual Funds
Risk Reduction Through Portfolio Optimization: Investors can choose funds with positive rolling return profiles to reduce expected risk in their portfolio while at the same time maximizing expected returns.
Investment Strategy Adjustment: Investors can use rolling returns to determine ideal holding periods for different funds or asset classes, and adjust holding periods based on the economic cycle or market conditions.
Benchmarking Performance: Rolling returns provide an insightful type of comparison of a fund's or portfolio's performance than a traditional point-to-point return. It is used to compare returns against relevant market indices.
Planning and Forecasting: Understanding historical rolling returns has a high predictive ability for future performance, helps in assuming possible future returns, and aids investors in developing a strategy for desired financial goals.
Advantages of Mutual Fund Rolling Returns
Impartial Assessment: Rolling returns demonstrate an unbiased perspective of a fund’s performance because they reflect continuous data and unlike CAGR they are not reliant on any specific start and end dates and this helps in accurate return calculation despite fluctuations in the market.
Flexible Assessment: Investors can adjust the periods of rolling returns which helps them in customized analysis that aligns with their financial goals and changing market conditions.
Future Expectations: Historical rolling returns point to realistic expectations of the future performance of the mutual fund or any other investment vehicle, which assists in solid financial planning.
Risk Assessment: An evaluation of rolling returns produces variability of returns, which is useful to investors, as it shows them their projected risk. For example, consistent rolling returns will produce a lower risk for the investment; lower risk appeals to a more conservative investor.
Disadvantages of Mutual Fund Rolling Returns
Data Dependency: A lot of historical data is required in calculating rolling returns. If the series of the historical price or return data is incomplete or unavailable, this may turn into a wrong assessment of the same.
Variability in Outcomes: The results of rolling returns may vary based on the different intervals used for a specific period. Such variability makes it difficult for the task of comparing consistency in investment. For instance, the performance of a fund might look good for one-time interval and might not be that good for another, and this may lead to misjudging it.
Market condition limitations: The concept of the rolling return may not capture the essence of the alteration in the market. The high rolling return indicates the excellence of performance of a fund during a bull run, which does not imply that the same fund will perform equally well during bear market conditions. In this respect, the rolling returns create the wrong impression about the staying power of the fund in different economic conditions.
Interpretation Complexity: The computation and analysis of the rolling returns are complex. They are somewhat difficult for a beginner investor to interpret. Misconception may result in misguided investment decisions, especially for beginner investors.
Rolling Returns vs CAGR
Rolling returns are a measure of investment performance over moving or overlapping periods. It is a continuous return series. A 3-year rolling return for a fund, for instance, would be calculated starting from 2019 to 2022 and then from 2020 to 2023, and so on, to help evaluate consistency.
The Compound Annual Growth Rate reflects the time-value return of an investment over a period. For instance, if an investment of ? 10,000 grows to ? 15,000 in 5 years, the CAGR would be around 8.45%. While CAGR evens out volatility, the rolling returns give a wider glimpse of the stability of performance.
Also Read: XIRR vs CAGR
Conclusion
The rolling return indicates wide performance analysis, averaging over a large number of overlapping return periods. This would even out the short-term fluctuations in the investment. The computation of rolling returns checks on these averages over set intervals, thus showing valuable insights into consistency, risk, and long-term reliability.
Calculations of rolling returns are particularly useful when comparing funds and their relative performance concerning market indices. However, rolling return necessitates a great quantity of data, may also be sensitive to the chosen timeframes, and can be bulky in interpretation, leading to misjudgment.
To investors, research into mutual funds that have impressive rolling returns is essential in informed decision-making. An understanding of how to compute and view such returns serves to give a nonbiased clear vision of the actual performance of such funds, allowing for rational investment decisions in step with the long-term goals of the investor.
