Rolling Returns of Mutual Funds

What Are Rolling Returns of Mutual Funds?

Rolling returns of mutual funds are a way to measure the annualised performance of a mutual fund over multiple overlapping periods, each starting on a different date. Instead of looking at returns between two fixed points in time, this method shows how the mutual fund has performed across different market conditions.

Investors can calculate returns for a chosen time horizon on a rolling basis, whether daily, weekly, or monthly, to see how consistent and stable a fund’s performance is. This approach reduces the bias when results are influenced by specific start or end dates that may coincide with unusual market highs or lows.

Analysts and investors widely use rolling returns to compare funds, understand volatility, and evaluate whether a fund has delivered steady results. They provide a complete historical performance analysis, helping investors make informed decisions.

Why Rolling Returns Are Important for Mutual Fund Analysis?

Mutual fund rolling returns are better than standard ways of measuring returns in the following ways:

• Assessing the risk: Investors can determine if the fund's volatility fits their risk level by looking at the rolling returns' range and standard deviation.

• Performance Stability Assessment: A fund's consistency in outperforming its benchmark or peer group over multiple overlapping periods is determined by rolling returns. This demonstrates whether the performance is sustained or merely a consequence of particular market conditions.

• Fund Comparison: They enable an impartial, side-by-side assessment of various funds during identical market phases. The comparison is impartial and free of biases resulting from market scheduling, as all funds are subjected to the same time frames.

• Risk Profiling: The analysis of rolling returns exposes volatility patterns, which assist investors in matching funds to their personal risk tolerance. Funds with more consistent returns suggest a lower risk profile.

• Identification of the Optimal Holding Period: By observing rolling return trends, investors can identify the time horizon that maximises the likelihood of attaining positive returns.

• Preventing Short-Term Noise: Rolling returns mitigate temporary market fluctuations, preventing investors from basing their decisions solely on recent events or one-time market surges. This results in investment decisions that are more well-informed and long-term.

How to Analyse Rolling Returns?

Investors should consider several key factors influencing accuracy and interpretation to evaluate rolling returns effectively. These include:

1. Duration and Frequency

   The first step is selecting a time horizon that fits your investment goals. For short-term goals, rolling returns over 6 months, a year, or even once a week can show how things are going shortly. For long-term goals, rolling returns over 3, 5, or 10 years give you a better picture of the fund's performance during different market cycles. Increasing the calculation frequency, such as daily, weekly, or monthly, generates more data points and allows for deeper analysis.

2. Consider Dividends and Fees

   You must include all reinvested dividends to do a proper rolling return study because they make a big difference in the total returns. Management fees, transaction costs, and exit loads should also be considered. Including these ensures that the net return numbers show how much the investment is worth.

3. Analysis of Mean Return

   Finding the average of all the rolling return values for the chosen time can help you have realistic expectations about how well the investment might do. This average return, also called the mean return, shows if the fund constantly follows, goes above, or below its historical trend.

4. Evaluation of Standard Deviation

   Standard deviation is the most popular way to measure volatility, an important part of return analysis. If the standard deviation is high, results change significantly over time, meaning there is more risk. On the other hand, a low standard deviation means that performance is stable, which may be better for buyers who like to play it safe.

5. Adjusted Returns for Risk

   Risk-adjusted performance measures, like the Sharpe Ratio, look at both return data and volatility to better understand how well a fund makes money compared to the risk it takes. When investors use these kinds of measures to look at rolling returns, they can fairly compare funds with different levels of risk.

6. Thoughts on the Time Horizon

   Lastly, it's important to remember that shorter rolling times often show more volatility because of short-term changes in the market. These changes tend to be smoothed out by longer rolling periods, which give a more accurate picture of the fund's overall success trends. This makes them particularly valuable for assessing long-term investments.

How Can Rolling Returns Be Used to Compare Mutual Funds?

Rolling returns help you compare mutual funds by:

• Consistency Check: Analyse how frequently a fund delivers returns higher than a chosen benchmark or category average across multiple rolling periods. A fund that consistently outperforms its benchmark demonstrates stronger reliability than one with irregular outperformance.

• Volatility Profile: Calculate the standard deviation of rolling returns to understand how stable or risky a fund’s returns have been. A lower standard deviation indicates smoother performance with fewer sharp fluctuations, while a higher one signals more volatility and potential risk.

• Downside Analysis: Identify the lowest rolling return recorded during the evaluation period. This figure represents a fund’s worst-case performance scenario and helps investors gauge potential losses in adverse market conditions.

• Long-Term Leadership: Examine how often a fund ranks among the top performers in its category over different rolling periods, such as 3-year or 5-year horizons. A fund that maintains high rankings consistently is generally more dependable than one that delivers exceptional returns only occasionally.

• Risk-Adjusted Comparison: Compare the risk-adjusted rolling returns of different funds using metrics such as the Sharpe Ratio. This approach ensures you evaluate both the return potential and the level of risk taken to achieve those returns.

• Suitability for Investment Goals: Align the rolling return patterns with your investment horizon and risk tolerance. For example, choose funds with low volatility and steady rolling returns if you prefer stability. If you seek higher growth potential and can tolerate fluctuations, select funds with higher but more variable rolling returns.

Key Takeaways

Rolling returns offer a more consistent, equitable, and transparent method of assessing the performance of mutual funds over time. They analyse multiple overlapping periods, which helps identify funds that consistently deliver steady results in various market conditions, in contrast to point-to-point returns. Rolling return analysis helps investors better understand a fund’s performance, stability, and risk. Both new and experienced investors can use this method to make more informed and confident investment decisions. Consider initiating a Systematic Investment Plan in the top mutual funds in India, as determined by rolling return insights, to accumulate long-term wealth.