What are Rolling Returns in Mutual Funds?

You have two mutual fund choices to invest. How will you decide which one you should invest in? Well, generally, investors look for consistency in performance. They check 1-year, 3-year, or 5-year returns to see the outcome. But this is time-bound and, to a certain extent, restricted as well. So, as a beginner investor in mutual funds, this can be really confusing. 

So, now the question is: Is there any way to find the bigger picture and better evaluate the funds? This is where rolling returns in mutual funds come in. They help you see how a fund has performed across different time frames. This helps you gain a fair and more reliable measure of consistency and risk-adjusted performance.

But what is this exactly, and how do you actually use it? Well, let us explore all the details needed in the guide here. 

What Are Rolling Returns of Mutual Funds?

Rolling returns of mutual funds show performance across multiple overlapping periods. So, instead of depending on a restricted period, from start to end, it shares your results for overlapping periods to get a better and clearer picture. 

For example, instead of just checking 3-year returns from 2020 to 2023, rolling returns calculate every possible 3-year return within that span. This makes them a more reliable way to judge consistency and long-term performance.

The primary features of the rolling returns in mutual funds include:

• Show fund performance over overlapping periods

• Eliminate bias of fixed point-to-point returns

• Reflect market ups and downs more accurately

• Help measure consistency and volatility

• Allow easy comparison between funds in the same category

How to Use Rolling Returns of Mutual Funds

Rolling returns are not just numbers. But this is a smart tool that is used by investors to make the right investment decision. So, here is how you should be using the same:

• Compare Funds: Check rolling returns of two or more mutual funds. Ensure these are in the same category. This will help you to see which delivers more consistent performance.

• Test Consistency: Look for funds that show steady rolling returns across. These should be the details over different periods of time to ensure there has been detailed consistency.

• Assess Risk: Once you have the data, you need to evaluate it. If there is high fluctuation, then the fund is risky to invest in. Hence, you must look for a more stable option. 

• Long-Term Check: Use 5-year and 10-year rolling returns to judge if the fund can sustain growth over market cycles.

• Better than Point-to-Point: Rely on rolling returns instead of only yearly or 3-year returns to avoid misleading conclusions.

Why Rolling Returns of Mutual Funds Matter

When you look at mutual fund performance, regular return figures often fail to capture the full story. This is why rolling returns of mutual funds are considered more reliable. They provide a fairer measure to see how the mutual funds are working. 

Whether it is the flexi-cap fund or the arbitrage fund, you can use this tool easily. So, if you are looking to use the same, here are the benefits of using rolling returns:

• Eliminates Bias: There is no distortion linked to the start and end dates. This ensures that the results you get are not just more aligned but also effective in nature. 

• Shows Consistency: They highlight whether a mutual fund delivers steady returns over different time frames.

• Captures Market Cycles: Rolling returns include both rising and falling markets. This helps you to see the bigger picture and get a balanced idea of what is happening.

• Helps in Fund Comparison: Investors can use this to compare the fund. Proper comparison allows you to find the mutual funds safer to invest in and ones that you should avoid. 

• Risk Awareness: They reveal volatility. This helps the investors understand the stability of returns better.

Limitations of Rolling Returns of Mutual Funds

While rolling returns of mutual funds are very useful, they are not without drawbacks. Investors should be aware of the following points before relying on them:

• Data Dependence: Rolling returns need long-term data. This is why, when you look to invest in new funds, you might fail to find this data. 

• Complexity: Unlike simple point-to-point returns, rolling returns are complex. You would need to evaluate various overlapping periods, which can be complex for various investors. 

• No Guarantee: Good rolling returns in the past are not an assurance for better returns in the future. So, solely relying on this can sometimes lead to wrong investments. 

• Category Bias: Comparing across different fund categories using rolling returns is not advised. You might not get a clear picture, and at times, investing based on this can lead to negative returns or risks as well.

• Limited Use Alone: Rolling returns should never be used alone. You must actually use certain other tools, like ratios and analytical tools, to get a clearer picture. 

Example: Comparing Rolling Returns of Two Mutual Funds

Suppose you are comparing Fund A and Fund B over a 5-year period with 3-year rolling returns.

Observation: Fund A shows more consistent rolling returns between 9% and 13%, while Fund B fluctuates more between 6% and 9%. This means Fund A is a better choice. So, if you're looking for better growth and stability, this is what you need to select. 

Conclusion

Rolling returns of mutual funds are one of the most effective ways to judge consistency, performance, and risk over time. Unlike point-to-point returns, they show how a fund behaves. And this is not just for a certain period but also across multiple market cycles.

Get clear insights and make wise decisions when it comes to investing. So, by using the rolling returns along with other indicators, you can build a stronger, more reliable portfolio.

So, if you are ready to start your investment journey strong, use this. Connect with Rupeezy today.

FAQs

1. Why are rolling returns better than point-to-point returns?

Rolling returns are considered better because they capture fund performance across multiple time frames, avoiding the bias of picking one start and end date. This gives a more balanced and fair view of consistency.

2. Can rolling returns help in selecting SIP investments?

Yes, rolling returns are very useful for SIPs. it can show you which SIP has been performing well over different cycles for different start periods as well. This can help you get a holistic picture, which is quite important for effective investment. 

3. Do all fund houses provide rolling return data?

Not all fund houses show rolling returns directly on their websites. However, most leading AMCs, research platforms, and aggregators like Rupeezy, Value Research, and Morningstar provide rolling return analysis.

4. What is a good rolling return for mutual funds?

There is no fixed number. But if the fund is performing well and delivering consistent returns over different cycles, then this is a good sign. Also, if the rolling returns are above its benchmark and category average, then it's stable.

5. How often should investors check rolling returns?

There is no defined time to check or review. But if you want to ensure better returns in longer duration, try checking every six monthly or yearly.