Have you ever wondered if a mutual fund’s past performance truly reflects its future potential? Many investors rely on fixed-period returns, but these can be misleading. A fund that looks strong today may have struggled in the past. So, how do you get a clearer, more accurate picture? This is where rolling returns come in. Now let us explore the importance of rolling returns in mutual funds.
What Are Rolling Returns?
Rolling returns help you track mutual fund performance over different time periods. Fixed returns show performance of a fund for a specific time frame. But rolling returns give a continuous view of how a fund performs across multiple periods. This method helps you see if a fund performs consistently over time.
How Does Rolling Returns Work?
Rolling returns are calculated over a set period, such as 1-year, 3-year, or 5-year returns. However, instead of looking at one fixed period, they are evaluated on a rolling basis. This means the returns are checked at regular intervals, like every day, every month, or every quarter.
For example, if you calculate a 3-year rolling return starting from 2015, you don’t just check 2015–2018. Instead, you calculate the return for 2015–2017, then move forward and check 2016–2018, then 2017–2019, and so on. This way, you get a continuous view of the fund’s performance over different time periods.
How are Rolling Returns Calculated?
Let us see the steps to calculate rolling returns.
1) Select the time frame
First, decide the rolling period you want to analyze. Common options include 1-year, 3-year, or 5-year rolling returns. The choice depends on how long you want to assess the fund’s performance.
2) Decide the evaluation period
Next, decide how frequently you want to check the performance. You can evaluate rolling returns daily, weekly, or monthly. For example, if you choose a 3-year rolling return with monthly intervals, you check the return every month over multiple 3-year periods.
3) Compute overlapping returns
After selecting the time frame and evaluation period, measure the fund’s performance for each rolling period. Instead of analyzing a single start and end date, calculate returns for overlapping periods. This gives a more realistic view of the fund’s performance.
For example:
If you track a 3-year rolling return starting from 2015, you calculate returns from 2015–2018, then from 2016–2019, then from 2017–2020, and so on.
This process continues until you reach the latest available data.
4) Average the returns
Finally, add up all the rolling return values and calculate the average. This gives a clearer picture of how the fund performs over time. A stable rolling return suggests consistency.
Example of Rolling Returns Calculation (3-Year Period)
The formula for calculating rolling return is:
Rolling Return = (Ending Price / Starting Price)1/3 −1
Starting Price = Price or NAV at the beginning of the period
Ending Price = Price or NAV at the end of the period
n = Number of years (in this case, 3 years)
Suppose a mutual fund has the following returns:
| Date | Price or NAV (₹) | Date | Price or NAV (₹) | 3 Year Rolling Returns |
| 01-Jan-2015 | 100 | 01-Jan-2018 | 130 | 9.14% |
| 02-Jan-2015 | 102 | 02-Jan-2018 | 132 | 8.88% |
| 03-Jan-2015 | 101 | 03-Jan-2018 | 131 | 8.94% |
| 04-Jan-2015 | 103 | 04-Jan-2018 | 134 | 9.13% |
| 05-Jan-2015 | 104 | 05-Jan-2018 | 136 | 9.45% |
| 31-Jan-2016 | 100 | 31-Jan-2019 | 160 | 16.96% |
| 30-Apr-2016 | 105 | 30-Apr-2019 | 170 | 17.42% |
| 31-Jul-2017 | 110 | 31-Jul-2020 | 175 | 16.74% |
| 15-Oct-2017 | 108 | 15-Oct-2020 | 180 | 18.56% |
| 31-Dec-2017 | 104 | 31-Dec-2020 | 136 | 9.45% |
- This table represents a 3-year rolling return calculation for a mutual fund, based on the price movement from 2015 to 2020.
- The first date represents the starting date for the rolling period. The first price (₹) is the NAV (Net Asset Value) of the fund on that date.
- The second date represents the ending date of the rolling period (3 years later). The second price (₹) is the NAV after 3 years.
- The 3-year rolling return (%) is calculated based on the growth between these two dates.
- If we take 1st Jan 2015 – 1st Jan 2018, the return is 9.14%. Moving one day forward (2nd Jan 2015 – 2nd Jan 2018), the return is 8.88%.
- The rolling returns fluctuate over time depending on market conditions. The highest return is 18.56% and the lowest return is 8.88%.
- If a fund has stable rolling returns over time, it’s reliable for long-term investing. But if returns fluctuate too much, it may be too risky.
- Don’t assume past high returns will repeat. Instead, check rolling returns to see if the fund performs well in both good and bad markets.
- The highest return (18.56%) was in 2017-2020, while the lowest (8.88%) was in 2015 – 2018. If you invested in 2015, your 3-year returns were lower than someone who invested in 2017.
Understanding Rolling Return Analysis
Interpreting rolling returns helps you evaluate a mutual fund’s consistency and reliability. By analyzing rolling returns, you can assess how a fund performs. Here is how to interpret the results:
1) Higher rolling returns indicate strong fund performance
A fund that consistently delivers higher rolling returns than its benchmark or peers is considered a strong performer. This means the fund has managed to generate good returns over different time periods.
For example, if a mutual fund regularly beats its benchmark over multiple rolling periods, it shows steady growth. So, a fund with higher rolling returns is a good choice for long-term investors seeking wealth creation.
2) Low volatility in rolling returns is a positive sign
Funds with stable rolling returns are less risky. If the rolling returns do not fluctuate much, it indicates that the fund performs consistently over time.
On the other hand, large variations in rolling returns suggest higher volatility. A fund with unpredictable ups and downs may not be ideal for conservative investors. By choosing a fund with low volatility, you can reduce the risk of sudden losses.
3) Negative rolling returns indicates a poor-performing fund
If a fund frequently delivers negative rolling returns, it signals weak performance. A fund that shows negative returns in multiple rolling periods may not be a good choice for long-term investment.
For instance, if a mutual fund has negative rolling returns in several consecutive periods, it means the fund struggles during market downturns. Before investing, it is essential to check how often the fund has delivered negative returns.
By understanding rolling return analysis, you can choose funds that match your risk tolerance and financial goals. Moreover, regularly checking rolling returns ensures you invest in funds with consistent and reliable performance.
4) Compare with benchmarks
Always compare a fund’s rolling returns with its category average and benchmark index, such as Nifty 50 or Sensex. A fund that consistently outperforms its benchmark is a strong investment choice.
For example, if a fund’s rolling returns are consistently higher than the category average, it indicates strong management and strategy. However, if a fund underperforms compared to its benchmark, it may not be the best option. Comparing returns helps you identify funds with better long-term potential.
Why is Rolling Returns Important?
1) Gives a clear picture of fund performance
Fixed returns can be misleading. If a fund performed well only during a particular time frame, it might seem better than it actually is. But, rolling returns show how a fund has performed in different market conditions over time.
2) Compares funds
When you compare two mutual funds, rolling returns helps you understand which fund is more consistent. A fund with stable rolling returns is generally a better choice than one with highly fluctuating returns.
3) Useful for SIP investors
If you invest through a Systematic Investment Plan (SIP), rolling returns help you see how the fund has performed over different entry points. So you can decide whether the fund is suitable for long-term investing.
4) Important for lump-sum investors
If you invest a large sum at once, knowing rolling returns can help you understand how the fund performs in different market phases. This helps you avoid funds that only perform well in specific conditions.
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5) Helps fund managers in decision making
Rolling returns help fund managers evaluate fund consistency. They can analyze whether a fund delivers steady returns or if it performs well only in certain situations. This helps them adjust investment strategies accordingly.
Key Takeaways:
- Rolling returns eliminate timing bias and provide consistency analysis.
- They are essential for SIP investors and long-term investment planning.
- Mutual funds with stable rolling returns are perfect for risk-averse investors.
- Use rolling return analysis alongside benchmarks for better decision-making.
Final Thoughts: Take a Step Forward with Smart Decisions
It is important to know the role of rolling returns in mutual funds. Because, they give you a clear view of a mutual fund’s performance. So before investing in any mutual fund, always check its rolling returns. This helps you understand its long-term stability and growth potential. With this knowledge, you can choose funds that align with your financial goals. Make smart investment choices and stay informed. Happy investing!
