Rolling returns, also known as rolling time periods or rolling period returns, represent the annualised average returns concluding on a specified year. These returns play a crucial role in understanding the return characteristics over a holding period, offering valuable insights to investors.
Analysing the rolling returns of mutual fund schemes or portfolios sheds light on their historical performance during a specific timeframe. This detailed data provides investors with more accurate information, allowing them to assess performance across various time periods rather than relying on a single snapshot. Rolling returns serve as a tool to enhance the clarity of historical performance over multiple intervals.
Understanding Rolling Returns
Rolling returns, also referred to as "rolling period returns" or "rolling time periods," represent the average annualised returns for a specific duration, whether it is a week, month, or any defined period's endpoint. They are frequently employed to analyse how returns behave over different holding periods.
A holding period signifies the duration an investor retains an investment, spanning from its purchase to sale. This metric provides a clearer understanding of a fund's performance across multiple periods. The Trailing 12 months (TTM) stands out as a widely utilized measure for rolling returns.
This table explores key factors to consider when analysing rolling returns to gain valuable insights into your investments:
Factor |
Description |
Impact on Analysis |
Investment goal & horizon |
Long term: Choose longer rolling periods (3-5 years) to understand average performance. Short-Term: Use shorter periods (daily/weekly) to track short-term trends. |
Focuses analysis on the timeframe relevant to your investment goals. |
Dividends & fees |
Reinvest dividends and subtract fees for a more accurate picture of net investment performance. |
Ensures calculations reflect the actual return after accounting for income and expenses. |
Mean return |
Sum of all returns over a period divided by the number of time intervals. |
Provides an average return to expect from your investment over time. |
Standard deviation |
Volatility of returns. A higher value indicates greater risk. |
Helps assess the level of risk associated with the investment. |
Risk-adjusted returns |
Factors in standard deviation to compare investments with different risk levels. |
Enables comparison of investment options based on both return potential and risk tolerance. |
Time horizon |
Longer Horizons: Offer a more stable and reliable picture of the investment's performance. Shorter Horizons: May be more volatilde and unpredictable. |
Choosing the appropriate timeframe ensures the analysis reflects the investment's long-term potential. |
Also read: Understanding returns from mutual funds
Importance of rolling returns for mutual fund analysis
Rolling returns are a valuable tool for mutual fund investors, unlocking crucial insights to guide decision-making. Here's how:
- Spotting consistent performers: Analysing rolling returns helps identify funds with a history of delivering positive returns across various timeframes. This consistency is a strong indicator of a fund's reliability and potential for future success.
- Comparative advantage: Rolling returns allow for a side-by-side comparison of different funds' performance over varying periods. This empowers investors to select the fund that best aligns with their investment goals and timeframe.
- Risk assessment made easy: By incorporating risk-adjusted returns calculated from rolling returns, investors can gauge the level of risk associated with each fund. This vital information helps them choose investments that align with their risk tolerance, ensuring a well-balanced portfolio.
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How to calculate rolling returns in mutual fund?
Rolling returns provide a dynamic view of a mutual fund's performance by considering returns over various timeframes within a larger investment horizon. This helps investors understand how the fund has behaved under different market conditions.
Calculating rolling returns:
- Define your investment horizon:
The first step is to determine the total period you will be invested in the fund. This could be your retirement timeline, a child's education goal, or any other long-term objective. - Choose your review intervals:
Next, decide on the frequency you want to see the performance calculated. Weekly, monthly, or quarterly intervals are common choices. These intervals act like snapshots within your overall investment horizon.
Example:
Let's say you plan to invest in a mutual fund for the next 10 years. You might choose to analyse rolling returns on a quarterly basis. This would generate 40 sets of rolling returns (10 years x 4 quarters/year). Each set would represent the fund's performance for the past 3 years (assuming quarterly intervals).
By analysing these rolling returns across different timeframes, you gain valuable insights into the fund's consistency, volatility, and overall risk profile. This information empowers you to make informed investment decisions that align with your risk tolerance and financial goals.
Advantages of measuring rolling returns of mutual funds
- Insight into long-term performance: Rolling returns offer a comprehensive view of an investment's performance across various market cycles, enabling investors to evaluate its long-term potential and sustainability.
- Risk assessment: By analysing rolling returns, investors can assess the volatility and risk associated with an investment over different time frames. This allows for a more informed decision-making process and better risk management strategies.
- Diversification evaluation: Rolling returns help investors evaluate the effectiveness of their diversification strategies by assessing the performance of individual assets or portfolios across diverse market conditions.
- Performance comparison: Rolling returns enable investors to compare the performance of different investments or investment strategies over time, facilitating better allocation of resources and portfolio optimisation.
Applications of rolling returns
Understanding rolling returns
Rolling returns, also known as rolling period returns, are used to assess the performance of an investment over a series of overlapping periods. This method calculates returns for various time frames, such as 1-year, 3-year, or 5-year periods, rolled daily, monthly, or quarterly. This approach offers a comprehensive view of an investment’s consistency and reliability.
Measuring consistency
One of the primary applications of rolling returns is measuring consistency. By calculating returns over multiple overlapping periods, investors can observe how consistently a fund has performed. This helps identify whether a fund's performance is stable over time or if it fluctuates significantly. Consistent performance is often a desirable trait, especially for long-term investors seeking reliable returns.
Comparative analysis
Rolling returns are instrumental in comparative analysis. Investors can compare the rolling returns of different funds over the same periods to identify which fund has performed better consistently. This comparison can be particularly useful when choosing between multiple investment options, as it highlights which funds are more reliable and have sustained performance over time.
Risk assessment
Assessing risk is another crucial application of rolling returns. By analysing the variability in returns over different periods, investors can gauge the volatility and risk associated with a particular investment. Funds with lower variability in rolling returns are generally considered less risky, making them more attractive to risk-averse investors.
Performance attribution
Rolling returns also aid in performance attribution. By examining the returns over various periods, investors can identify specific time frames where a fund outperformed or underperformed. This can help in understanding the factors contributing to the fund's performance, such as market conditions, economic events, or managerial decisions. Performance attribution is essential for making informed investment decisions and improving future strategies.
Planning and forecasting
Lastly, rolling returns are valuable for planning and forecasting. Investors can use historical rolling return data to predict future performance and make informed investment decisions. By understanding past trends and patterns, investors can set realistic expectations and develop strategies that align with their financial goals. This forward-looking approach helps in building a resilient investment portfolio.
How rolling returns add value to the investor?
Looking at just a single period's return (like 5-year returns) does not tell the whole story. Rolling returns offer a more valuable perspective for investors by considering several key factors:
- Market cycle representation: Traditional returns might be skewed by starting or ending during a specific market phase (bullish or bearish). Rolling returns present a broader picture, encompassing performance across various market cycles.
- Predictive power: While future performance is never guaranteed, past consistency offers valuable insights. Rolling returns reveal how a fund has performed through different economic conditions, potentially indicating its future behavior.
- Risk assessment: By analysing the dispersion (variation) of rolling returns, investors can gauge the fund's consistency. Lower dispersion suggests more stable returns, which might be preferable for long-term financial goals.
- Financial planning: Financial plans typically span decades, with periodic investments and withdrawals. Rolling returns provide a more unbiased view of a fund's historical performance across various timeframes, helping investors assess its suitability for their long-term needs.
How to put rolling return information in your investment portfolio?
Here are various methods to incorporate rolling return data into your investment portfolio decision-making process for mutual funds:
- Rolling returns offer a comprehensive view of fund performance across multiple market cycles, analysing returns over individual intervals.
- By selecting different intervals like three, five, or ten years, investors can gauge the highest and lowest average returns expected from the mutual fund over time.
- Comparing rolling returns of two mutual fund over an extended period provides valuable insights into their performance under different market conditions.
- Rolling returns offer a more accurate and unbiased method of assessing mutual fund performance over longer durations.
They showcase the consistency and reputation of mutual funds over extended periods, aiding investors in evaluating their long-term performance.
Difference between Trailing and Rolling Returns
Here are some differences between trailing and rolling returns:
Trailing Returns |
Rolling Returns |
Trailing returns assess the mutual fund's performance over specific periods like one, three, and five years, calculated from one date to another. |
Rolling returns gauge returns at various time points, offering insights into the fund's performance across different periods. |
It represents a type of point-to-point return that is annualised. |
Multiple blocks of three, five, or ten-year periods can be utilised at different intervals for analysis. |
Offers clear insight into absolute returns. |
Offers insight into average returns across a timeframe. |
Provides an indication of the fund's long-term performance. |
Indicates how it performed over time at specific intervals, considering performance and consistency. |
Conclusion
In conclusion, rolling returns serve as a valuable analytical tool for investors seeking to gain deeper insights into the performance of their investments. By embracing the dynamic nature of rolling returns, investors can make informed decisions, mitigate risks, and optimise their investment portfolios for long-term success.
