Rolling Returns in Mutual Funds: The Smart Way to Measure Consistent Performance

When a person picks mutual funds, they often focus on returns from just 1 or 3 years. But that doesn’t always tell the full story. Markets go through ups and downs and fund returns change with them. That’s why rolling returns matter! They show how a mutual fund performs over many different time periods, giving you a better idea of how steady and reliable it really is. 

Keep reading to know what are rolling returns, why they’re important and how you can use them to make smarter investment decisions that last.

What is Rolling Returns in a Mutual Fund?

Rolling returns refer to the performance of an investment fund over moving time periods rather than any random timeframe. By calculating returns over sequential blocks of time, they measure the fund’s ability to generate consistent returns under varying market conditions.

For example, a 3-year rolling return evaluates the annualised performance over successive 3-year periods. It tracks how ₹10,000 invested across each timeframe would have grown. So if a fund delivered 16%, 17% and 15% annualised returns respectively over the 2014-2016, 2015-2017 and 2016-2018 period, its 3-year rolling return would be 16% (average of all 3-year returns).

Similarly, analysis can also be done for 1-year, 5-year or longer rolling periods. The underlying mechanism remains calculating returns over consecutive blocks of an equal timeframe. So for 5 years, it will be past 5 years, then the previous 5 years minus one year and so on as the window rolls forward one full term at a time.

How to Calculate Rolling Returns of Mutual Funds?

Rolling returns are calculated by taking periodic snapshots of a fund’s returns over a window of fixed intervals. For instance, 1-year, 3-year or 5-year rolling returns.

1-year rolling returns will show the yearly returns over overlapping 1-year periods. If we need to determine the 1-year rolling returns over the last 5 years, we will calculate annual returns over the following periods:

• Year 1: 01 Jan 2017 – 31 Dec 2017
• Year 2: 01 Jan 2018 – 31 Dec 2018
• Year 3: 01 Jan 2019 – 31 Dec 2019
• Year 4: 01 Jan 2020 – 31 Dec 2020
• Year 5: 01 Jan 2021 – 31 Dec 2021

The periodic returns over each 12-month span are the 1-year rolling returns. Likewise, 3-year rolling returns will capture 3-year intervals, and 5-year rolling returns will use 5-year periods.

Why Should You Analyse Rolling Returns?

Analysing rolling returns provides answers to critical questions that point-to-point returns fail to address:

• Has the fund been able to sustain performance over full market cycles?
• Does performance remain consistent over different periods?
• Does the fund fare better in bull runs or bear markets?

Rolling returns analysis gives a clearer and more accurate view of a fund’s performance by avoiding the bias of looking at only specific time periods or recent results. It shows how well the fund has built wealth consistently over the long term.

How Does It Help Make Better Investment Decisions?

Irrespective of the returns quoted in a mutual fund’s fact sheet, rolling returns analysis helps gauge if the performance parameters shown hold merit across periods. Here is how:

• Track Record:

A healthy rolling return year-on-year indicates the fund’s strategies are delivering consistent returns across varying conditions. It signifies experience in repeating outperformance over long investment horizons.

• Risk-Return Profile:

A short-term 5-year CAGR (Compound Annual Growth Rate) of 15% might seem excellent. Still, if rolling returns keep fluctuating between 5-10% over cycles, it exposes the strategy’s inconsistent risk-reward nature. Analysing volatility trends in rolling returns helps conclude whether fluctuations denote healthy corrections or indicate disproportionate risks for the returns.

• Downside Protection:

In bull runs, almost all equity funds deliver higher returns. The true test of a fund manager’s mettle lies in containing downsides during market corrections. Funds with smaller cuts in rolling returns during downturns typically fall more slowly in market crashes. Their ability to protect capital denotes better survival instincts for long-term wealth creation.

5 Smart Ways to Use Rolling Returns for Your Investment Strategy

While most investor service platforms share annual rolling returns, the analysis remains limited if not put in context correctly. Here is how DIY investors can extract the full utility:

1. Custom Timeframes: Instead of standard 1, 3, and 5-year periods, consider custom timeframes similar to your investment goals—7, 10, or 15 years.
   
2. Start from Different Peaks: Request custom dates to see if the fund’s performance matches the market tops of 2000 and 2008.
   
3. Risk-Return Analysis: To gauge risk-reward payoff, Map rolling returns on a graph against category/benchmark returns.
   
4. Portfolio Impact: Evaluate contributions of funds with steady rolling returns to reduce portfolio fluctuations during uncertain times.
   
5. Future Consistency: Funds staying consistent in rolling returns inspire confidence in their philosophies and the probability of repeating historical performance.

The Bottom Line

Rolling returns show how a fund has performed over different time periods, helping you check its consistency and risk. It’s a smart way to review past trends before investing, though it doesn’t guarantee future results.

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FAQs

What does a 3-year rolling period mean?

A 3-year rolling period refers to the annualised returns generated by a mutual fund over successive 3-year periods. For example, if we need to determine the 3-year rolling returns of a fund during 2014-2022, the periods will be:

• 2014-2016
• 2015-2017
• 2016-2018
• 2017-2019
• 2018-2020
• 2019-2021
• 2020-2022

So in the above periods, the fund’s returns for each 3-year timeframe are calculated. The average of annualised returns across all periods gives the 3-year rolling return.

Which mutual fund is best based on rolling returns?

Instead of just looking at how much return a mutual fund gives, it’s better to see how consistently it performs over time. The best mutual funds are the ones that give steady returns across different market conditions and don’t fall too much when the market goes down. These funds have a strong track record and are more dependable for long-term equity investments. Investors should always do their own research and choose funds that match their financial goals and risk comfort.