To understand how an investment option like a mutual fund has performed over a particular period, you generally take a look at its returns. But what if we tell you that there are different types of returns, each presenting a different perspective of their own?
Trailing returns and rolling returns are two of the most common ways through which investors determine the performance of an asset. Continue reading to get to know all about these two methods and a detailed comparison of trailing returns vs. rolling returns to understand the differences between the two.
What are Trailing Returns?
Trailing returns is one of the many methods investors use to determine the performance of an asset. It involves measuring the returns produced over a specific timeframe leading up to the present date.
The method is often used by investors, fund managers and financial analysts to quickly assess the performance of an asset over a specific period, which can be weeks, months or maybe even years. Some of the most common periods are trailing one month, trailing three months, trailing six months and trailing one year. Irrespective of what the chosen period is, the end date is always the current date.
One of the many advantages of trailing returns is that it is very useful for short-term analysis. However, due to the short-term nature of the method, it may also be more sensitive to market volatility.
Trailing Returns: An Example
Before we look at what rolling returns are in a mutual fund, let’s look at a hypothetical example to understand how investors calculate trailing returns and how it is used.
Let’s say that you invested in an equity mutual fund on January 17, 2021. At the time of investment, the NAV was ₹90. The current NAV of the fund as of January 17, 2024, is ₹115. You wish to find out the trailing two-year returns for the fund.
To do that, you would need to subtract the NAV at the beginning of the year from the NAV at the end of the year, divide the resulting figure by the NAV at the beginning of the year and then multiply it by 100.
| Trailing Returns = {[(Current NAV – NAV at the beginning of the period) ÷ NAV at the beginning of the period] * 100} |
Substituting the above-mentioned figures in the formula, we get the trailing 2-year returns of the mutual fund.
Trailing 2-Year Return = {[(₹115 – ₹90) ÷ 90] * 100} = 27.77%
What are Rolling Returns?
Now that we’re done with trailing returns let’s quickly take a look at what rolling returns represent.
While trailing returns let you know how much an asset has grown between two points in time, rolling returns provide you with information on how much an asset has grown over various holding periods within a given timeframe.
Since rolling returns consider all possible holding periods within a timeframe, it offers a more comprehensive and detailed overview of the performance of an asset. This is one of the many reasons why mutual fund managers and investors prefer to use rolling returns. The most common time frames for rolling returns are 3 years and 5 years.
A major advantage that rolling returns have over other methods is that it negates the impact of short-term market volatility and fluctuations. This is because it takes average annualised returns for multiple holding periods during a time period. Also, it gives you a better idea of how well an investment has performed across different market conditions.
Rolling Returns: An Example
To understand how rolling returns work, here’s a hypothetical scenario. Assume that you wish to invest in an equity mutual fund and you wish to calculate its 4-year rolling returns from 2019 to 2024. You need to first pick a starting point. Let’s say that you pick the 1st of January as the starting date.
To calculate the rolling returns, you need to first calculate the average annualised return from the 1st of January, 2019 to the 1st of January, 2023. Once that’s done, go forward by one day and calculate the return from the 2nd of January, 2019 to the 2nd of January, 2023. Then, go forward by another day and calculate the return from the 3rd of January 2019 to the 3rd of January, 2023. You need to keep doing this until you’ve covered every possible time frame.
Then, plot the rolling returns on a graph to visualise the performance of the mutual fund over the 5-year period. By simply observing the graph, you can quickly determine how much return the fund has delivered for any day of the 5-year timeframe.
Difference Between Trailing Returns and Rolling Returns
Now that you’ve seen what rolling returns are, let’s move on to the comparison between trailing returns vs. rolling returns. The table below highlights the key differences between these two methods of calculating returns.
| Particulars | Trailing Returns | Rolling Returns |
| Calculation Method | Measures the returns an asset has delivered over a specific time frame ending on the present date | Measures the average annualised return of an asset over every possible day of a given time frame |
| Endpoint | The endpoint is always fixed at the current date | The endpoint is variable since the returns are calculated for all possible starting and ending points within a given time frame |
| Flexibility | Since the endpoint is fixed, this method is not very flexible | The method is very flexible since it considers all possible points within the time frame |
| Usefulness | Useful for making quick assessments of an asset’s performance | Useful for making in-depth performance analysis of an asset |
| Sensitivity | Trailing returns may be sensitive to short-term market volatility | Rolling returns are less sensitive to short-term market volatility |
| Effectiveness | To determine short-term returns and the recent performance of an asset | To determine the long-term consistency and performance of an asset |
| Ideal For | Making quick decisions based on recent performance | Making informed investment decisions with a long-term outlook |
Conclusion
With this, you must now be aware of what trailing returns and rolling returns are and how they’re calculated. While these two methods may help you determine the performance of an asset, it is crucial to remember that making investment decisions solely based on the returns is not ideal.
As an investor, you also need to look into other factors like your investment objectives, risk profile and charges associated with investing in the asset. Remember, analysing an asset across all quantitative and qualitative factors before investing will help you make a well-informed investment decision.
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FAQs
What is the primary advantage of trailing returns?
Trailing returns offer a quick and simple way to assess an investment’s recent performance, making it easy to evaluate its performance over a given timeframe.
What is the key difference between trailing and rolling returns?
The key difference is that trailing returns have a fixed starting and ending date and provide returns for that specific timeframe, whereas rolling returns provide returns for all possible holding periods within a specified timeframe.
In what situations is using trailing returns more appropriate?
Trailing returns are often used to make quick assessments and comparisons. They can be useful when you wish to know how an asset has performed up until a particular date.
Do investors use trailing returns or rolling returns when analysing long-term investments?
For long-term investment analysis, most investors prefer using rolling returns as they reduce the influence of short-term market volatility and provide a more stable and robust measure of the asset’s performance.
Is trailing or rolling returns more sensitive to short-term market fluctuations?
Since trailing returns have a fixed ending date, they’re more sensitive and prone to being affected by short-term market fluctuations.
