ROLLING VS TRAILING RETURNS
Mutual funds depend on successful pooling of money from investors to buy securities that fill in as investment vehicles for investors so that they can achieve their financial goals even if they do not have the required expertise and knowledge. These funds are controlled and managed by investment professionals and experts. The fund can be either conventional with security but restricted returns or they can be offering higher returns clubbed with more risks.
The returns earned on investments depict the performance of mutual funds. This performance can be calculated through two of the popular ways which are namely, 1. Rolling Returns 2. Trailing Returns.
In this article, we will discuss various aspects of this and understand them in detail.
Every investor does not buy a mutual fund on the 1st day of a year or months and holds it exactly till the end of the year or a fixed tenure. Investors keep buying and selling on any given day throughout the year. Trailing returns measure the performance of the fund for just one block of tenure and in that sense, they suffer from a bias of recent performance. It is the most basic and used way to ascertain funds’ historical performance. They measure total returns over standardized tenure, usually with a recent ending date, making them simple to understand and comparable with a relevant peer group or index. It is determined by looking at the NAV of a fund at the beginning of the tenure compared to the end of the tenure and then determining the change.
For example, Let’s assume a fund started with a value of Rs 1000 on 1 January 2020 and ended with a NAV of Rs. 2000 on 1 January 2025.
By using the compounding formula, the year-on-year return will be 18.92%. This means your investment might have grown to Rs. 1189.2 in the first year. The return numbers are just average and it doesn’t necessarily mean that the fund has produced a return of 18.92% every year rather the returns can be different every year and while calculating for the entire tenure, the average return is coming out to be 18.92%.
The next year, the return might be Rs. 1189.2 + 18.92% of 1189.2 which will be Rs. 1414.19 and this keeps going on.
A couple of features of trailing returns are:
- Data is easily present at any point of time
- Historical data is used for a block of tenure
These are the average returns taken for a specific tenure on every year/quarter/month/day till the last date of the transaction. This measure calculates the returns for the specified period while starting by taking blocks of weekly, monthly, quarterly, or yearly performance during the period. It allows investors to evaluate the consistency of a fund’s performance over years including the volatilities of the market which are a significant test for fund managers’ skill.
For instance, A monthly 5 years rolling return starting from 1st April 2015. Thus the return will be calculated from 1st April 2015 to 31st March 2020, 1st May 2015 to 30th April 2020, and it keeps going like this.
Some of the features of rolling returns are:
- They are more accurate and show a fair picture
- They are not biased towards any period of tenure.
- It is an effective measure to evaluate the fund’s performance.
- More reliable way as it provides proper insights to investors.
DIFFERENCE BETWEEN ROLLING AND TRAILING RETURNS
The trailing returns provide the manner in which the mutual fund has performed over a long period. Nevertheless, It is difficult to understand from this insight concerning how reliable the fund was during market volatilities which influence the return percent for an investor.
Rolling returns will give you the overall yield of the mutual fund over some time at explicit stretched which will help the investor with picking up the best mutual fund regarding consistency and performance.
Despite the fact that we generally observe the insights as far as trailing returns by AMC and locales, rolling returns have additionally also became popular among investors.
1. What are trailing returns?
Trailing returns measure the performance of the fund for just one block of tenure and in that sense, they suffer from a bias of recent performance.
2. What are the basic features of trailing returns?
The basic features of trailing return are that historical data can be used for a block of tenure and data is easily present at any point in time.
3. What are rolling returns?
Rolling Returns are the average returns taken for a specific tenure on every year/quarter/month/day till the last date of the transaction. These returns calculate all of the periods starting every week, month, quarter as desired by the investor. It allows investors to evaluate the consistency of a fund’s performance over years.
4. What is the key advantage of Rolling Returns?
The key advantage of rolling returns is that they are more accurate and reliable as they provide proper insights to the investors.
5. What is the difference between trailing and rolling returns?
Trailing returns provide insights on performance for a long period whereas rolling returns will give you the overall yield of the fund over the period at pre-defined intervals.
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