Rolling Returns in Mutual Funds: Meaning, Calculation and Significance

When evaluating mutual funds for potential investment, it is important to analyse the fund's historical performance*. One key metric to consider is the rolling return, which measures the fund's average annualized return over several overlapping periods. Examining rolling returns provides insights into the fund's volatility and performance across different market conditions.
*Past performance may or may not be sustained in future.

Read on to understand what rolling returns are and how they matter for mutual fund analysis.

• Table of contents

• Rolling returns definition
• Why rolling returns matter for mutual fund analysis
• How to calculate rolling returns for mutual funds
• Evaluating rolling returns
• Using rolling returns to compare mutual funds
• Why measure mutual fund rolling returns?
• Example of rolling returns analysis for a mutual fund

Rolling returns definition

A rolling return is the average annualised return of an investment fund over a specified time frame that moves forward in increments. In other words, rolling returns measure how an investment has performed across multiple overlapping time periods. Instead of looking at just one fixed window, this method calculates returns for several back-to-back intervals. This allows you to see how an investment performed at different points within that period.

In comparison, trailing returns measure an investment’s performance between two specific dates. For instance, an investment’s five-year trailing returns may be 12% (example is for illustrative purposes only). However, at different intervals within those five years, the investment value may have risen or fallen, sometimes drastically. In comparison, rolling returns show how an investment performed at various intervals within the five-year period, giving a more detailed picture of how consistent or volatile the performance was.

For example, if you're checking a mutual fund's 1-year rolling return over the past 5 years, it would look at how the fund performed during each one-year period within that timeframe. So, you'd check returns from 2015 to 2016, then 2016 to 2017, and continue like that up to the current date.

To get even more detailed, you could roll the periods forward month by month — like January 2015 to January 2016, then February 2015 to February 2016, and so on. Some analysts even use weekly or daily rolling windows for a minute view of performance trends.

Also Read: How To Measure Mutual Fund Performance

Why rolling returns matter for mutual fund analysis

Rolling returns are an important metric for evaluating and comparing mutual funds because they provide insights that simple 1, 3, 5, and 10-year average annual returns do not.

In particular, rolling returns help assess the below aspects:

• Consistency of returns: Rolling returns show if the fund was able to generate relatively consistent returns over time or if there was high variability. Funds with less volatility in rolling returns tend to perform better over long periods.
• Performance across market cycles: Rolling returns across bull and bear markets shows how the fund performs in different investing environments.
• Risk-adjusted returns: More consistent returns indicate that a fund had been managing risk and maintained relatively consistent performance across changing conditions, indicating more optimal risk-adjusted return potential.
• Manager skill: Steady rolling returns showcase a fund manager's skill in generating performance over the long-term, not just lucky short periods. It shows the manager's ability to adapt to evolving markets.

How to calculate rolling returns for mutual funds

Rolling returns are calculated by determining the annualised average return over a set time period, and then moving the time period forward incrementally to cover different multi-year periods. The steps are as below.

1. Select the data set- The broader the data set, the better view of fund performance across market cycles. Let’s assume you choose a 10-year period, from 2010 to 2020.
2. Select the rolling return period:Let’s assume you want to check the fund’s 2-year returns at different intervals between 2010 and 2020.
3. Select the rolling interval: This is the incremental period over which the returns will be rolled forward. This could be as granular as one day, or as broad as 1, 3, 5 years etc. Let’s assume you select a monthly rolling period.
4. Calculate returns: For the first period, January 1 2010 – January 1 2012, calculate rate of return.
5. Roll it forward: According to a monthly rolling period, the next interval would be February 2010 to February 2012. Calculate the CAGR for this period.
6. Calculate next rolling return: Repeat the calculation for the next window, March 2010 to March 2012. Continue the process till you reach the last applicable month of 2020.
7. Compile rolling returns: The output is a series of annualised returns for each of the set periods calculated. This shows the rolling return pattern over time.

In this case, you will see how the fund performed over different 2-year windows between 2010 and 2020.

Evaluating rolling returns

When examining rolling return data for mutual funds, there are a few key factors to evaluate.

• Range: Wider ranges between the highest and lowest returns signal greater performance volatility. Narrower ranges indicate more consistency.
• Trends: Relatively steady or increasing returns over time show improving fund performance (assuming market trends remain similar over the duration).
• Performance over different market cycles: Compare returns during periods of large market declines versus bull markets.

Using rolling returns to compare mutual funds

Analysing and comparing rolling return patterns can be a useful way to evaluate the performance of two or more mutual funds. Here are effective approaches to use in mutual fund comparison.

• Compare funds in the same category: See which maintains higher and more consistent rolling returns over time.
• Graph rolling returns: Visual comparison can clearly highlight performance differences over time.
• Estimate the standard deviation of rolling returns: Lower deviation indicates more consistent performance.
• Isolate bear/bull markets: Compare funds in the same categories during high and low market periods.
• Screen for funds: Sort and screen mutual funds by metrics like 5-year rolling return averages and standard deviation.
• Weigh with other metrics: Incorporate rolling returns with risk-adjusted return metrics such as alpha, Sharpe ratio, expense ratios, etc.

Make rolling return analysis part of your overall methodology for mutual fund evaluation and selection. Combined with other metrics and qualitative factors, it can guide you towards funds that have a track record of relatively steady growth. However, it is essential to note that past data is based on historical performance over a specific period. Past performance may or may not be sustained in future.

Why measure mutual fund rolling returns?

• Understanding of past performance: Rolling returns show long-term performance patterns, not just isolated snapshots.
• Insight across market environments: Performance across bull and bear markets demonstrates how funds handle volatility.
• Assess manager skill - Steady rolling returns indicate skill in generating relatively steady performance over time.
• Facilitates comparison - Rolling returns allow standardised comparison across funds.
• Lower volatility - Funds with less variable rolling returns have displayed lower volatility during the period under consideration.
• Supports screening - Rolling returns metrics help screen and select funds.

Also Read: How to calculate Mutual Fund returns?

Example of rolling returns analysis for a mutual fund

Let's walk through an example of calculating and assessing rolling returns for a hypothetical equity mutual fund - the ABC India Growth Fund. We will look at the 1-year rolling returns over 5 years. First, we need to calculate the returns. Here’s the NAV of the fund at different dates.

• Jan 1, 2018: Rs. 100
• Jan 1, 2019: Rs. 110
• Jan 1, 2020: Rs. 121
• Jan 1, 2021: Rs. 115
• Jan 1, 2022: Rs. 125
• Jan 1, 2023: Rs. 137.5

Now, we calculate the 1-year rolling returns:

1. 2018 to 2019: (110 / 100 - 1) x 100 = 10 percent
2. 2019 to 2020: (121 / 110 - 1) x 100 = 10 percent
3. 2020 to 2021: (115 / 121 - 1) x 100 = -4.96 percent
4. 2021 to 2022: (125 / 115 - 1) x 100 = 8.7 percent
5. 2022 to 2023: (137.5 / 125 - 1) x 100 = 10 percent

So, these are the five 1-year rolling returns calculated over a 5-year window (from 2018 to 2023).

Visually, the data indicates the ABC Fund's 5-year returns fluctuated between a high of 10% and a low of -4.96%, showing volatility.

Example for illustrative purposes only

Conclusion

When selecting funds for investment, incorporating rolling return metrics alongside other factors provides a more complete view of expected future returns and overall suitability for one's investment objectives. By taking time to calculate and interpret rolling return data, mutual fund investors have a better opportunity to identify well-managed funds that are likely to achieve their goals.

FAQs:

What is a rolling return of a mutual fund?

A rolling return is a series of annualised average returns for a mutual fund calculated over a set timeframe that moves forward in increments. For example, 5-year rolling returns would calculate annualised performance over years 1-5, 2-6, 3-7 etc. This shows returns across multiple periods.

What's a 3-year rolling return?

A 3-year rolling return calculates the annualised average return over 3-year periods that progress forward. For example, it would calculate the mutual fund's return for years 1-3, 2-4, 3-5, and so on. The 3-year return provides performance data over shorter time horizons.

How to check a rolling return of a mutual fund?

Rolling returns can be calculated using a fund's historical total returns over the timeframes of interest. Calculate the compound annual growth rate (CAGR) for each period, then compile the annualised returns in a table or chart. You can also refer to reliable research platforms for such information.

How to calculate 5-year rolling returns?

For 5-year rolling returns, calculate the total return over each 5-year period. Then use a CAGR calculator to convert the total returns into annualised average returns. Move the 5-year window forward one year at a time to compile the full series of rolling 5-year returns.