What are Trailing and Rolling Returns?

Investing in mutual funds can sometimes feel overwhelming, especially when trying to understand the performance of different funds. One key aspect of evaluating a fund’s performance is returns. Among the many ways to measure returns, trailing returns and rolling returns stand out. This blog will help you to understand them better and make informed decisions for your investments.

What is Trailing Return?

Trailing return shows how much an investment has grown or lost over a specific past period, like one year, three years, or five years. It looks at the performance from today and goes back to that time. Trailing return is often used by investors to quickly see how a mutual fund or stock has done in the recent past.

For example, if you check a fund’s 3-year trailing return today, it shows how much the fund has earned or lost over the last three years. This is a simple way to compare different funds over the same time frame. Trailing returns are usually expressed as a percentage, making it easy to understand how well (or poorly) the investment has performed during that period.

Features of Trailing Returns

Here are the features of trailing returns that make them a valuable tool for investors looking to assess the past performance of their investments.

1. Measures Past Performance

Trailing returns show how an investment performed during a past period, such as 1, 3, or 5 years, by looking backwards from the current date.

2. Fixed Time Periods

The return is calculated over specific, fixed periods like one year, three years, or more, offering a clear snapshot for comparison.

3. Easy to Compare

Investors can easily compare the returns of different funds or stocks over the same time frame, helping them make quick decisions.

4. Expressed as a Percentage

Trailing returns are usually shown as percentages, making them simple to understand. They indicate how much the investment has grown or shrunk in value.

5. Commonly Used by Investors

Trailing returns are a popular way for investors to assess how a fund or stock has performed in the recent past.

6. Simple Calculation

The calculation of trailing returns is straightforward, which is why it is widely used in mutual fund reports.

What is Rolling Return?

Rolling return helps in understanding how an investment has performed over multiple overlapping time periods. Instead of looking at just one fixed time frame, like with trailing returns, rolling returns calculate the performance over several periods of the same length. 

For example, if you want to see a 3-year rolling return, it shows how the investment did in many 3-year spans, such as from January 2019 to January 2022, February 2019 to February 2022, and so on.

This method provides a clearer picture of consistency by examining how an investment performs during different market conditions. Rolling returns are especially useful when planning for long-term goals, as they give a more comprehensive view of how the fund behaves through various cycles, rather than focusing on just one point in time.

Features of Rolling Returns

Here are the features of rolling returns that highlight their importance in evaluating the performance of investments over time, offering valuable insights for both short-term and long-term investors.

1. Consistent Evaluation

Rolling returns check the performance of an investment over multiple overlapping time periods, showing results for each interval (e.g., many 3-year periods).

2. Gives a Clearer Picture

Unlike fixed time frames, rolling returns reveal how stable or volatile an investment’s performance is over time.

3. Tracks Different Market Cycles

It allows you to see how an investment performs across various market conditions, offering better insight for long-term decisions.

4. Removes Bias from Specific Dates

By using several starting points, rolling returns avoid the impact of one-time events or market fluctuations, giving a more balanced view.

5. Helpful for Long-Term Investors

Those planning for long-term goals can rely on rolling returns to understand how the fund behaves over the years.

6. Widely Used for Fund Comparison

Rolling returns are often used to compare how different investments fare across time, providing more depth than a single-point return.

Also Read: Absolute Return in Mutual Funds: Formula and How it Works?

Differences Between Trailing and Rolling Returns

Both trailing and rolling returns are used to evaluate investments, but they differ in how they measure performance and provide insights.

Conclusion

Both trailing and rolling returns are essential tools in evaluating mutual fund performance. Trailing returns give you a quick, easy-to-understand snapshot of how a fund has done over a set period while rolling returns give you a deeper, more comprehensive view of a fund’s consistency over time. As an investor, knowing when to use each can help you make better decisions.

If you’re comparing funds for short-term investments, trailing returns might be enough. But for long-term investments, rolling returns provide more insight into the fund’s reliability over different market conditions.