Rolling Returns: Calculation, Benefits, Comparison with Trailing Returns & CAGR

Manish Kothari
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Manish Kothari

What is Rolling Returns ?

The rolling return is an annualized average return for a chosen duration beginning on a specified starting date and continuing sequentially to the last available date on a chosen time period. For example, 3 year returns every month implies at the end of the month the previous 3 years average rate of return is calculated. This shows how the returns for the previous 3 years have moved (or rolled) from one week to the next. 

This approach gives a more precise and in-depth image of the output of a portfolio as a return for the period under observation is measured continuously rather than relying on a fixed time frame. It tests the returns on investments at multiple points in time, thus removing any bias associated with the returns observed at a given point in time. You may use multiple blocks of 3, 5, or 10-year cycles, or any other block, at varying intervals by rolling returns to see how the investment has performed during that period.

How to calculate rolling returns ?

Rolling Returns, as already described, are more time-dynamic and sensitive. They emphasize on offering a transparent image of the returns accrued in a system, regardless of the time of admission and time of departure. The Rolling Returns calculation is carried out in two ways:

  • Deciding the overall amount of time for estimating returns
  • Finalization of the intervals in which the returns are considered

They are directly connected to each other in these two ways. Based on the time frame during which you plan to calculate the returns, the intervals are determined.

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Benefits of Rolling Returns

  • It is a key measurement for calculating the efficiency of mutual funds.
  • More Fairly Accurate
  • This strategy is not biassed against any specific span of time.
  • It is a safe way to show investment returns
  • It provides an investor with suitable insights.
  • Nice for a SIP investor or a recurring investment (i.e. weekly or quarterly)

Rolling Returns Vs. Trailing Returns

Trailing return will offer an indicator of how the fund worked from a given date to another date in the long term, but it is impossible to understand from those details how reliable the fund is in poor and good periods, impacting an investor's return percentage. On the other hand, rolling returns will give the fund's total return at specific intervals over a period of time, which will allow the investor to select the right fund in terms of efficiency and stability.

Rolling Returns Vs CAGR

CAGR calculates the return on investment for a given amount of time. It is based on the starting value of the NAV and the end value of the NAV for the duration and presumes that, in the meantime, the NAV has risen at a constant pace. Returns from CAGR bear what is known as recency bias. If the market has been having a bull run over the last year and stock rates have gone up, the fund's three-year and five-year CAGR returns will look fantastic. When the markets are down, the reverse occurs. CAGR ignores the volatility factor completely.

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One may want to look at rolling returns over various time spans to resolve the drawbacks of CAGR returns. Rolling returns are essentially annualized returns over various time spans or CAGR returns. You get to track continuous returns over many years instead of looking at the returns over a single period and can calculate how the fund manager has done in various intervals. You may also judge whether the investment just succeeded because of the action of the market, or because of the call of the fund manager.

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