If you are a new investor and are deliberating over which mutual fund scheme to invest into, you are likely to be tempted by the returns delivered by different schemes.
You may discover that some schemes have given 10 percent return, some gave higher return, while the rest lagged behind.
However, what do these historical returns reflect? As a matter of fact, returns are also of different types. The two categories are trailing returns and rolling returns. Let us understand each of them.
What are rolling returns?
Rolling returns are also known as rolling time period returns and are annualised average returns for a time period. They are used to evaluate a scheme’s past performance over a period of time i.e., for every day during the period. In other words, whichever day you had chosen to invest between this period, the rolling returns would be the same.
By looking at the rolling returns, one can get an idea of how a scheme performed over a period of time.
For instance, if a fund delivered a rolling return of 10 percent over a five-year period, this means if someone had invested in the scheme in the beginning of this period and sold the same at the end of five years — the return would be equivalent to 10 percent per annum.
What are trailing returns?
Trailing returns are the annualised returns given by a mutual fund scheme over a given period of time calculated from one point to another. These returns calculate point-to-point return from an investment.
For instance, when an investment of ₹100 at the start of first year in a scheme grows to ₹161 at the end of fifth year, this means absolute return stood at ₹61. An annualised return would turn out to be 10 percent per annum for each of the five years. Since the returns are calculated based on a specific time period i.e., between the first day of the year 1 and the last day of fifth year – they are known as trailing returns.
They are distinct from rolling returns in the way that they fluctuate based on the day of entry and exit of investment you opt for.
Which one is a better indicator of performance?
Wealth advisors assert that rolling returns are a better indicator of a mutual fund’s performance over a period of time, particularly when you are judging a scheme based primarily on its historical performance.
To be able to earn a given CAGR return, one must enter and exit the scheme on particular dates.
A fair idea of the scheme’s past returns over a given period of time can be made by examining the fund’s rolling returns and not the trailing returns.
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Published: 28 Dec 2023, 04:24 PM IST