Rolling Return Analysis | When Mutual Funds Give Bad Returns !

Not happy with your mutual fund performance? Do you think its a bad mutual fund, because it is not doing well from last few years? Today this article delight will tell you how to judge the returns of mutual funds using Rolling Return Analysis. This will help you to get more confidence in your mutual fund and will help you learn many aspects!

What is Rolling Return Analysis ?

The rolling return gives us a perspective of how the ‘n years’ return (growth) has evolved over the last ‘n years’.  Sounds confusing? Sure it is, so here we simplify it.

Whenever you measure returns or growth between two dates, the value you calculate is only valid for the two years under consideration. we call such a measurement of returns the ‘Point to point’ return. To get an accurate representation of how the two-year return (growth rate) looks, you need to calculate the ‘Rolling Returns’. Rolling returns are also termed as Rolling Period Returns or Rolling Time Periods. They measure the fund’s performance on a relative and absolute basis at regular intervals. A rolling return is the average of a series of returns over a long period of time. It is like a daily SIP for a certain interval and then taking an average of the series of returns. This makes returns more indicative of the actual performance of the fund. Therefore, this helps to analyze the return consistency over different periods as it considers both upside and downside market trends. 

How to Calculate Rolling Return ? | How to do Rolling Return Analysis

Rolling return means a series of returns data for each and everyday investment for a certain time frame.

Take an example of Mutual Fund A, lets assume a period of 14 yrs from 1st Jan 2007 to 30th Dec 2020. That’s approx. 5110 days. If you do a 2 yr rolling return analysis, it means that a period if investing for 2 yrs and you are plotting the CAGR return for each day of investment from the start. (that’s 730 days of investment)

So you invest on

• 1st Jan 2020 and exit on 1st Jan 2022 (1st instance)
• 2nd Jan 2020 and exit on 2nd Jan 2022 (2nd Instance)
• 3rd Jan 2020 and exit on 3rd Jan 2022 (3rd Instance)
• ….
• ….
• ….
• 30th Dec 2018 and exit on 30th Dec 2020 (4380 instances: 5110 – 730)

So you can plot these 4380 data points and that graph is called a rolling returns graph. In the same way, you can have a 3 yr, 5 yr or even 10 yr rolling return graph.

Still confusing..?

You can use this calculator that provides you Rolling Returns Analysis for specific fund automatically.

https://primeinvestor.in/mutual-funds-rolling-returns-calculator/

Advantages of Rolling Returns

A lot of mutual funds investors lose their patience looking at their mutual fund’s returns after they invest for 2-3 yrs. Its commonly suggested that an equity mutual fund will perform very good over the long term and one can expect double-digit returns, however, if the fund does not return back good returns within 2-3 yrs itself, the investors get very nervous and start judging their mutual fund quality and wonder if they made a right choice or not!

That’s when investors make a wrong choice of exiting the funds even if at the fundamental level, the fund has no issues. Its just the volatility of the equity which is driving the fund into negative return zone. Rolling return graph will give you a deeper understanding of how volatile fund returns have been. This kind of analysis tells you that because of volatility even this kind of good funds can see a period of non-performance and flat returns.

In short, Advantages of Rolling Returns :

• An effective measure to evaluate the performance of mutual funds
• Not biased towards any period
• Suitable for a recurring (monthly or quarterly) or a SIP investor

Rolling Returns Vs Trailing Returns

Trailing returns, or Point to Point returns indicate the performance of the fund for the said period. To calculate the trailing returns, the difference between the current net asset value and the net asset value at the beginning of the time period is ascertained. Then we divide this number by the net asset value at the beginning of the time period. If the current NAV of the mutual fund is Rs. 20 and the NAV at the beginning of the 5 year period was Rs. 15, then we would calculate the trailing returns as ((20-15)/15) * 100 = 33.33% over a 5-year period.

While, Rolling returns enable the calculation of returns for overlapping periods. It facilitates measuring returns at intended points of time, thereby eliminating bias due to returns being calculated at certain specific time periods. To calculate the rolling return, you can take an example of the period from say 2000 to 2010. In this time frame, if you intend to calculate a 1-year rolling series, then you need to consider various chunks of 1 year like 2000 – 2001, 2001-2002, 2002-2003 and so on. If the NAV for a one-year horizon moved from NAV of Rs. 15 as of January 01, 2000, to Rs. 20 as of January 01, 2001, then under the trailing returns these NAVs will be used for computation. However, if the NAV were to fall to Rs. 18 the following day (January 02, 2001), this fluctuation would not be captured by trailing returns.

So, Rolling returns help us evaluate the mutual fund across various cycles, it can help understand the highest, lowest and average returns over different horizons and have realistic expectations from the mutual funds.

Final Takeaway

Rolling returns of mutual funds are a better way to analyze the past performance of mutual funds than using the traditional point-to-point returns. Although rolling returns are more complex to calculate and require a good understanding of the mechanics for accurate calculation – they are considered a better measure as they consider the volatility. Also remember that rolling returns exercise is a great tool for analyzing the mutual fund, but it’s not the final exercise in itself. There are many other kinds of analysis which is possible and this exercise alone does not give any final judgement.

Read also : 3 Big Mistakes Investor Make In Their Life ( https://thebrightdelights.com/3-big-mistakes-investor-make-in-their-life/ )

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