Trailing and Rolling Return: Is there any difference between them?

8 Oct 2020  Read 756 Views

As an investor, you all must prefer the data of historical returns before investing in the mutual funds. But did you know that you can measure your returns in more than one way? 

There are two ways through which you can evaluate the performance of your mutual funds from the historical data in the current market, in terms of returns on investments:

  1. Trailing Returns
  2. Rolling Returns

These are the two methods to evaluate your mutual fund performance in the current market. You must be wondering how these methods work and what they are? Let’s walk you through them step by step by taking examples of some mutual funds.

Trailing Return

Trailing returns are those returns which can be calculated on the historical returns of mutual funds such as 1 year, 3 years, and 5 years or on the date basis. 

To put this in simple words, trailing returns are calculated on the point to point return and then annualizing them, hence this method is also known as point to point returns. 

If the returns are calculated on 1-year data, then it’s called a time absolute return. It provides a more transparent picture to the investors.

Let’s understand this with an example;

Suppose, you started a mutual fund with the value of 200 on January 1, 2020, ended with NAV (Net Asset Value; is equal to the company’s assets minus company’s liabilities) of 400 on January 1, 2025. The year on year returns can be calculated by the compounding formula:

Return = [(Ended value / Started value)^(⅕) - 1] Till january 1, 2025

This means your investment has grown from January 1, 2020, to January 1, 2025, to the result. 

Result =  [ 200 + ( 200 * Return)].

Next years that is on January 1, 2021, your return might be 

Next year return = [ Result + Return * Result]  and this process goes on until you reach the ended year of your investments. 

With the trailing return, you can see the great performance in your funds over 10 years, but you can not see a good performance of 1 or 5 years of your mutual funds.

Mutual Fund Scheme

Trailing Returns

1 year

3 years

5 Years

Axis Long Term Equity Fund-Growth- 1.33%10.65%14.41%

-1.33%

10.65%

14.41%

SBI Small Cap Fund Direct-Growth

-10.80%

11.94%

19.51%

Mirae Asset Large Cap Fund Direct-Growth

1.37%

11.82%

13.82%

Reliance Liquid Fund Direct-Growth

7.60%

7.20%

7.72%

LIC MF Index Sensex Fund Direct-Growth

0.38%

10.09%

7.96%

Rolling Return

Rolling returns are the average annualized returns of your daily/weekly/monthly returns till the last duration of your mutual fund. It shows the absolute and relative performance over regular intervals of the time. 

For example

Between different times of interval: Let's take a five-year rolling series starting April 1, 2020, for 15 years. Hence, returns would be calculated from April 1, 2020, to March 31, 2025; April 1, 2025, to March 31, 2030, and so on. Rolling returns take several such blocks of 3, 5, and 10 years of intervals and see how the funds performed in different intervals over the given periods, which makes the fund more indicative and gives the accurate performance of the fund. 

Due to the different intervals, the performance of the mutual fund can be analyzed by the market’s upside and downside trends. For example suppose, you bought a mutual fund, one year ago for 2000 rupees and sold it today for 2400 rupees. Your point to point or trailing return will be 20%. 

However, one limitation to this method is that on observation days, the values may change drastically if there is a change in return. 

Assume that the price of your fund drops to 2140 tomorrow, then your point to point return is no longer accurate. 

But the rolling return will analyze this fluctuation in price. It will analyze the returns from January 1 to February 2 of the year and January 2 to February 2 and then January 3 to February 3 and so on and then the rolling return method will analyze the average of these returns and will give you a more accurate result.

Example; Small and Mid-Cap Funds – Start date April 1 2014 – Rolling returns for a period of three years at an interval of three months:

 

Key Parameters (Return %)

Return Consistency (% of times)

Scheme/Category Name

Average

Median

Max

Min

< 0%

0 – 5%

5 – 10%

10 – 15%

15 – 20%

>20%

Aditya Birla Sun Life Equity Fund – Growth – Regular Plan

17.72

17.24

24.98

12.33

0

0

0

10.74

76.03

13.22

SBI Small & Midcap – Regular Plan-Growth

31.21

30.49

39.73

24.76

0

0

0

0

0

100

HDFC Small Cap Fund – Regular Growth Plan

21.01

21.07

26.21

16.48

0

0

0

0

25.62

74.38

Axis Midcap Fund – Growth

13.77

12.7

22.51

8.59

0

0

8.26

68.6

10.74

12.4

ICICI Prudential MidCap fund growth

18.05

16.92

29.2

11.79

0

0

0

20.66

60.33

19.01

Difference Between Trailing and Rolling Returns

  1. Trailing return calculates the historical returns based on point to point returns. An investor may end up investing in a mutual fund that performs well in the past, but this is not an ideal situation. However, Rolling returns to analyze the historical data and give a clear picture of the performance of the mutual fund.
  2. Both can use the time intervals of 3 years, 5 years, and 10 years of period to analyze the highest, lowest, and average returns of the fund.
  3. Rolling returns analyze the markets upside and downside and present a clearer picture of the market situation as compared to the Trailing returns.
  4. The calculation of the funds is more accurate by Rolling returns as compared to Trailing returns.
  5. Returns are calculated through the time interval without any biases of calculation over the time period. When you begin your investments in mutual funds, the rolling return is more reliable compared to the trailing returns.
  6. Investors believe in investing in a systematic investment plan(SIP) at a regular interval. In this situation, rolling returns are more workable and credible.
  7. When investing into a longer time period, roller returns calculate the performance of your mutual funds more accurately as compared to trailing returns.

Example of trailing and rolling returns of large-cap funds: 

Fund

1-year rolling return

3-year rolling return

1-year trailing return

3-year trailing return

Mirae Asset Largecap Fund(G)

3.29%

13.23%

0.75%

11.20%

Axis Bluechip Fund(D)

3.35%

14.28%

0.73%

12.56%

ICICI Prudential Bluechip Fund(G)

0.51%

10.77%

-2.11%

8.77%

Aditya Birla Sun Life Frontline(G)

-1.30%

8.25%

-3.95%

6.55%

SBI Bluechip FundG)

1.33%

8.39%

-2.42%

6.39%

Nippon Large Cap Fund(G)

3.53%

12.81%

-0.24%

10.19%

HDFC Top 100 Fund(G)

6.85%

12.59%

3.24%

10.17%

Franklin India Bluechip Fund(G)

3.40%

6.30%

-5.75%

4.24%

Kotak Bluechip Fund(G)

1.05%

8.52%

-4.34%

6.46%

Conclusion

To sum it up, trailing returns help you calculate how your fund has performed between a particular period. However, rolling returns help you check the reliability (consistency) of how the fund has performed specifically in good or bad times. 

Rolling return is required to obtain accurate data that gives one access to the overall estimated performance of the fund, with specific intervals to the investor. Currently, most fund tabulation available to us through fund houses is in terms of trailing returns; however, rolling returns has also gained steady popularity among these houses. 

About the Author: Divyanshu kumar | 10 Post(s)

Divyanshu is currently pursuing a Master's degree in Financial economics. Growing up, he has always been interested in codes and numbers which he has gradually learnt to express in words too.

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