Rolling Returns in Mutual Funds

Have you ever wondered how to measure a mutual fund’s consistent performance over different time periods? Rolling returns help us do just that. They show how a mutual fund has performed over various overlapping periods, giving us a clearer picture of its stability and reliability. 

In this blog, you will explore rolling returns, how to calculate them, and how to use them to analyse mutual funds effectively. 

What is Rolling Return in Mutual Funds?

Rolling returns in mutual funds helps us understand how a fund has performed over different periods. Instead of looking at performance from one specific date to another, rolling returns consider overlapping periods, giving us a better picture of the fund’s performance consistency.

For example, if we want to check the rolling returns for the last five years, we need to look at the returns from January 1, 2019, to December 31, 2023. 

Instead, we check the returns from January 1, 2019, to December 31, 2023, then from February 1, 2019, to January 31, 2024, and so on. Doing this lets us see how the fund performed in different market conditions.

Rolling returns are essential because they smooth out the market’s ups and downs. This helps us understand how stable and reliable a mutual fund is over time. They are beneficial when comparing different funds. A fund with consistent rolling returns is usually considered more trustworthy than one with high but inconsistent returns.

Rolling returns give us a more precise and accurate picture of a mutual fund’s performance over time, helping us make better investment decisions.

How to Calculate Rolling Returns of Mutual Funds: Step-by-Step Calculation

Step 1: Choose the Time Period

 Decide the time frame you want to analyse, such as one year, three years, or five years.

Step 2: Select the Start Date:

Pick the starting point for your first period.

Step 3: Calculate the Returns:

Find the return for the chosen period starting from your selected date.

Step 4: Move to the Next Period: 

Shift the start date by one month or another interval and calculate the return again.

Step 5: Repeat:

Continue this process until you reach the end of your overall time frame.

Step 6: Average the Results:

Once you have all the returns, average them to get the rolling return.

Following these steps, you can calculate the rolling returns for any mutual fund.

Tools and Resources for Calculation

Calculating rolling returns can be time-consuming if done manually. Thankfully, there are several tools and resources to make it easier:

1. Online Calculators: Many financial websites offer free rolling return calculators.
2. Spreadsheet Software: Programs like Excel or Google Sheets can help automate the calculation.
3. Financial Software: Some investment platforms provide built-in tools for calculating and analysing rolling returns.

Using these tools, you can quickly and accurately calculate rolling returns for your mutual funds.

Example of Rolling Returns

A hypothetical mutual fund with the following annual returns over five years:

• Year 1: 10%
• Year 2: 12%
• Year 3: 8%
• Year 4: 15%
• Year 5: 9%

We want to calculate the 3-year rolling returns for this fund.

1. First 3-Year Period: Calculate the average return for Year 1 to Year 3.
   • (10% + 12% + 8%) / 3 = 10%
2. Second 3-Year Period: Shift one year forward and calculate the average return for Year 2 to Year 4.
   • (12% + 8% + 15%) / 3 = 11.67%
3. Third 3-Year Period: Shift another year forward and calculate the average return for Year 3 to Year 5.
   • (8% + 15% + 9%) / 3 = 10.67%

So, the 3-year rolling returns for this mutual fund are:

• 10%
• 11.67%
• 10.67%

Interpreting the Results

When we look at these rolling returns, we can draw several insights:

1. Consistency: The returns are relatively consistent, around the 10-12% range.
2. Comparison: If we compare these rolling returns with another fund in the same category, we can see which fund is more stable and reliable.
3. Trends: No drastic drops or spikes indicate that this fund performs steadily over time.

By analysing rolling returns, we get a clearer picture of how the mutual fund performs under different market conditions and over various periods. 

Factors to Consider When Analyzing Rolling Returns

How to Analyze Rolling Returns

When analysing rolling returns, it’s essential to compare different mutual funds. 

Start by calculating each fund’s rolling returns over the same period. This lets you see which fund performs better consistently. 

For example, if Fund A has rolling returns of 10%, 11%, and 12%, and Fund B has 8%, 9%, and 10%, Fund A performs better. 

Comparing these results helps you choose the fund with more reliable returns. Always compare funds in the same category, like equity or debt, to ensure a fair analysis.

Let’s compare two actual mutual funds, HDFC Equity Fund and SBI Bluechip Fund, over three overlapping 3-year periods.

Analysis:

• HDFC Equity Fund: It has shown higher and more consistent returns (12%, 13%, 11%) over the periods.
• SBI Bluechip Fund: Its returns have been lower and declining (10%, 9%, 8%) over the periods.

HDFC Equity Fund performs better and is more consistent than SBI Bluechip Fund, making it a more reliable choice for investors.

Conclusion

Rolling returns give us a comprehensive view of a mutual fund’s performance by showing how it fares over various periods. Understanding and analysing rolling returns can help us make more informed investment decisions. They help us identify consistent performers and avoid those that are too volatile. Remember, while rolling returns are helpful, they should be one of many factors in your investment strategy. Happy investing!

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