Rolling Returns

Rolling return is a valuable concept in mutual fund investing. They provide a dynamic and broad view of a fund's performance over various periods, helping investors make informed decisions and assess the suitability of an investment for their financial goals.

What Is Rolling Return?

Rolling return is a way to analyse the average annual return of a mutual fund scheme over multiple time frames within a larger investment horizon. Unlike traditional returns, calculated from a fixed start and end date, rolling returns provide a continuous and overlapping view of a fund's performance.

Rolling returns show how a fund has performed over various holding periods, such as one year, three years, five years, or any other timeframe. This approach helps investors understand a fund's consistency and volatility across different market conditions, enabling them to better evaluate its potential for future performance.

Importance Of Rolling Returns For Mutual Fund Analysis

Rolling returns play a crucial role in mutual fund analysis, offering several key advantages:

● Identifying Consistent Performers: By analysing rolling returns, investors can spot funds consistently delivering positive returns across various periods. This consistency strongly indicates a fund's reliability and potential for future success, making it easier to identify top-performing funds that align with investment goals.

● Comparative Analysis: 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 suits their investment objectives, risk tolerance, and time horizon, giving them a competitive edge in their decision-making process.

● Risk Assessment: Incorporating risk-adjusted returns calculated from rolling returns helps investors gauge the risk associated with each fund. This vital information lets them choose investments that align with their risk tolerance, ensuring a well-balanced and diversified portfolio.

● Trend Identification: Rolling returns can reveal patterns and trends in a fund's performance, helping investors understand how it has behaved under different market conditions. This insight is invaluable for making informed decisions about when to enter or exit an investment.
Calculation Of Rolling Returns (With Example)
Calculating rolling returns involves a few simple steps:

● Define the Investment Horizon: Determine the period you plan to invest in the mutual fund. This could be a retirement timeline, a child's education goal, or any other long-term objective.

● Choose Review Intervals: Decide how frequently you want to analyse the fund's performance. Common intervals include weekly, monthly, quarterly, or annually.

● Calculate Rolling Returns: For each interval within your investment horizon, calculate the fund's returns over the specified period. For example, if you choose a quarterly review interval for a 10-year investment horizon, you would calculate 40 rolling returns, each representing the fund's performance over the past three years.

Example: Let's say you plan to invest in a mutual fund for the next 10 years and want to analyse its performance quarterly. This would generate 40 rolling returns (10 years x 4 quarters per year), each representing the fund's performance over the past three years (assuming a quarterly review interval).

By analysing these rolling returns across different timeframes, you gain valuable insights into the fund's consistency, volatility, and overall risk profile, empowering you to make informed investment decisions that align with your risk tolerance and financial goals.

Applications Of Rolling Returns

Rolling returns have several practical applications in the world of mutual fund investing:

● Performance Evaluation: Rolling returns provide a dynamic view of a fund's performance, allowing investors to assess its consistency and identify potential red flags, such as extended periods of underperformance or excessive volatility.

● Portfolio Optimisation: By comparing the rolling returns of various funds, investors can optimise their portfolios by selecting funds that complement each other's performance patterns, reducing overall risk and maximising potential returns.

● Investment Strategy Refinement: Rolling returns can help investors refine their investment strategies by identifying the optimal holding periods for different funds or asset classes, enabling them to adjust their investment horizons accordingly.

● Benchmarking: Rolling returns can be used to benchmark a fund's performance against relevant market indices or peer group funds, providing a more comprehensive and accurate comparison than traditional point-to-point returns.

● Risk Management: By incorporating risk-adjusted rolling returns, investors can better manage their portfolio's overall risk exposure and ensure that their investments align with their risk tolerance levels.

Advantages And Limitations Of Rolling Returns

Like any analytical tool, rolling returns have both advantages and limitations that investors should be aware of:
Advantages:

● Comprehensive View: Rolling returns offer a more holistic view of a fund's performance by considering multiple periods, providing a better understanding of its consistency and volatility.

● Unbiased Analysis: Rolling returns are not biased towards any specific start or end date, as they consider overlapping periods within a larger investment horizon. This results in a more objective assessment of a fund's performance.

● Flexibility: Investors can customise the periods and intervals used to calculate rolling returns, allowing them to tailor the analysis to their specific investment goals and preferences.

● Risk Evaluation: Rolling returns can be used to calculate risk-adjusted metrics, such as the Sharpe and capture ratios, providing valuable insights into a fund's risk-return profile.
Limitations:

● Historical Data Dependency: Rolling returns rely on historical data, which may not accurately reflect future performance due to changing market conditions or fund management strategies.

● Complexity: Calculating and interpreting rolling returns can be more complex than traditional return measures, especially for investors with limited financial knowledge or experience.

● Short-term Bias: While rolling returns can provide insights into long-term performance, they may not be as effective in capturing short-term trends or market fluctuations.

● Survivorship Bias: Some rolling return calculations may be affected by survivorship bias, which includes only funds that have survived over the entire analysis period, potentially skewing the results.

Trailing VS Rolling Returns

While both trailing returns and rolling returns are used to evaluate mutual fund performance, they differ in their approach and the insights they provide:

Trailing Returns:

● Trailing returns assess a mutual fund's performance over specific periods, such as one year, three years, or five years, calculated from one date to another.

● They represent a type of annualised point-to-point return, providing a clear indication of the fund's long-term performance.

● Trailing returns offer insights into absolute returns but do not account for consistency or volatility across different market conditions.

Rolling Returns:

● Rolling returns gauge a fund's performance at various times, offering insights into its performance across different periods within a larger investment horizon.

● Multiple blocks of three-, five-, or ten-year periods can be utilised at different intervals for analysis, providing a more comprehensive view of the fund's average returns and consistency.

● While trailing returns focus on absolute returns, rolling returns indicate how a fund has performed over time at specific intervals, considering both performance and consistency.

Conclusion

Rolling returns are essential for mutual fund investors, offering a comprehensive and dynamic view of a fund's performance across various periods. By analysing rolling returns, investors can identify consistent performers, compare funds, assess risk, and refine their investment strategies. While rolling returns have limitations, their ability to provide insights into a fund's volatility, consistency, and risk-return profile makes them invaluable for making informed investment decisions and achieving long-term financial goals.