How To Measure Mutual Fund Performance: Trailing Vs. Rolling Returns 

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The past return on a mutual fund scheme is one of the key factors that investors analyse. So, it is important to understand what data to look at to assess mutual fund returns and how to interpret the numbers.

In this article, we will explore two common ways of measuring mutual fund returns – trailing and rolling returns. Understanding the difference between trailing and rolling returns in mutual funds can not only help you understand the performance of your mutual fund investments but also make informed decisions in the future.

  • Table of contents
  1. Trailing vs. Rolling Returns: Understanding Mutual Fund Performance Metrics
  2. Trailing returns
  3. Rolling returns
  4. Differences between trailing and rolling returns
  5. FAQs

Trailing vs. Rolling Returns: Understanding Mutual Fund Performance Metrics

The past return on a mutual fund scheme is one of the key factors that investors analyze. So, it is important to understand what data to look at to assess mutual fund returns and how to interpret the numbers.

In this article, we will explore two common ways of measuring mutual fund returns – trailing and rolling returns. Understanding the difference between trailing and rolling returns in mutual funds can not only help you understand the performance of your mutual fund investments but also make informed decisions in the future.

Trailing Returns

Trailing returns measure the performance of a fund over a defined period, ending on a specific date. For example, you could measure the performance of a fund over the past five years, from February 10, 2018, to February 10, 2023.

Returns measured by trailing in mutual funds can give a quick glimpse of the point-to-point performance of a fund. This method can also be useful for comparing the returns of two funds over the same period.

However, they may not provide a complete picture as they do not show the fluctuations in the fund's performance along the way. For example, if a fund has given a 10% return in five years, there would have been times in that period where the returns could have fallen to 1% or risen to 30%.

So, though trailing returns are useful as an overview of the fund’s performance, they do not show how volatile the fund may have been.

Rolling Returns

Another way to measure mutual fund performance is through rolling returns.

Rolling returns analyze the performance of an investment over various overlapping periods. Instead of focusing on a fixed time frame, this metric calculates returns for consecutive periods.

For example, a rolling one-year return of a mutual may look at data over five years and calculate the return for each successive one-year period within that time frame. The timeline is rolled forward to show how a fund would have performed over each one-year period in the last five years. For instance, the data would be calculated from 2015 to 2016, then 2016 to 2017 and so on until the present date. To be more thorough, the data could even be rolled forward on a monthly basis (January 2015 to January 2016, February 2015 to February 2016 and so on). Weekly and daily rolling intervals could offer an even more granular perspective.

Rolling in mutual fund returns thus provide a comprehensive view of an investment's performance and volatility.

Differences between Trailing and Rolling Returns

Here are some key differences between the two measurements:

  • Measurement basis: Trailing returns measure the performance between two points of time – a start date and an end date. Rolling returns take a larger period and roll the dates forward to show the average point-to-point returns at various intervals within that period.  
  • Simplicity: Trailing returns are simple to calculate and understand. They give investors a simple way to get an idea of their fund’s past performance at a glance. This metric is also useful for comparing the performance of two schemes during the same period. In comparison, calculating and understanding rolling returns requires more effort.
  • Limitations: Trailing returns do not show the fund's consistency or volatility in the assessment period. They are also susceptible to selection bias (the choice of starting and ending point can alter the results). On the other hand, rolling returns are more complex to calculate as it is data-intensive. Results are better represented on charts or infographics, which may be harder to interpret.  

Conclusion
Knowing the difference between trailing and rolling returns in mutual funds can give you a more complete picture of the performance of your mutual fund investments. While trailing returns can give an overview of a fund's performance, rolling returns provide a more comprehensive view across market cycles. By looking at both trailing and rolling returns, you can make informed investment decisions and work towards potentially achieving your financial goals.

FAQs:

What are trailing returns used for in mutual funds?
Trailing returns are used to assess the past returns of a fund over a specific start and end date. They can be used to compare the performance of different mutual funds over the same timeframe.

What are rolling returns used for in mutual funds?
Rolling returns are calculated by taking the average return of a fund over a specific period, rolling forward on a regular basis. They offer insights into the fund's consistency.

Which is better for evaluating performance: trailing returns or rolling returns in mutual funds?
Both trailing and rolling returns have their advantages and disadvantages. A comprehensive fund analysis should also include other factors like risk-adjusted returns, volatility, expense ratios, the fund's investment objectives, etc.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.

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