What Are Rolling Returns in Mutual Funds
and Why They Are Important

Bonvista Financial Services Pvt. Ltd.

21 Jan, 2025

Investing in mutual funds might seem difficult With all the numbers and terminology used to assess performance. One phrase that is frequently used is "Rolling Returns." In this article, we shall define rolling returns and explain why they are an essential tool for any investor in mutual funds.

Understanding Rolling Returns:

A technique for assessing a mutual fund's performance across certain periods is rolling returns. Rolling returns offer a more dynamic picture than absolute returns or annualized returns, which examine performance over a predetermined period.

For instance, suppose you wish to examine the performance of a fund over five years. Rolling returns will compute the performance over several overlapping 5-year periods (e.g., January 2018 to December 2022, February 2018 to January 2023, and so on) rather than focusing only on one specific 5-year timeframe (such as January 2018 to December 2022).

Rolling returns provide a more consistent view of the fund's performance by examining several periods and mitigating short-term market swings.

How Rolling Returns Are Calculated?

To calculate rolling returns, follow these steps:

The first step is to decide the time period i.e. 1 year, 3 years, or 5 years.
The second step is to choose the frequency: Daily calculation, monthly calculation, or quarterly calculation.
The third step is to calculate returns: For each overlapping time period, calculate the returns.
The final step is to average the return results: Analyze the returns across all time periods to identify patterns and consistency.

Difference between Annualized Returns & Rolling Returns:

The main difference between annual returns and rolling returns is that annual returns is a method to measure the returns over a single year (Specific period), while rolling returns measure performance over multiple periods.

Why Rolling Returns Are Important?

Compared to more typical methods of assessing mutual fund performance, rolling returns provide a number of benefits. This is why they are important:

Consistency: A good mutual fund is one that generates steady returns throughout a range of time periods rather than one that does extraordinarily well in a single year or two. You can determine whether a fund's performance is steady over time by looking at its rolling returns.
Comparison of Two Funds can be better: As absolute or point-to-point returns rely significantly on the start and end dates used, comparing funds based on these metrics can be misleading. By offering a more complete picture of performance, rolling returns remove that bias.
Understand Volatility: Rolling returns, which examine returns across several time periods, can show how volatile a fund's performance is. This aids investors in selecting funds that suit their level of risk tolerance.
Market Cycle Insights: The ability to observe a fund's performance in bull, bear, and sideways markets is provided by rolling returns. For long-term investors, this information is priceless.

Let’s see an Example to understand Rolling Returns in a better way:

Let’s say you’re comparing two mutual funds:

Fund A has generated rolling 5-year returns of 25%, 15%, 12%, 20% and 28% over the 5 years. (Average is 20% returns)
Fund B has generated rolling 5-year returns of 17%, 20%, 22%, 19% and 22% over the same period. (Average is 20% returns)

While Fund A & B both funds have generated 20% average returns and might look attractive. However, Fund B’s consistent performance indicates that it is less affected by market volatility and has a more reliable track record.

There are several websites that provides you Rolling Returns of Mutual Funds. Few are listed below,

How to Use Rolling Returns in Your Mutual Funds Investing?

Assess Funds: Determine which fund has produced consistent performance by comparing similar funds in the same category using rolling returns.
Verify Consistency: Seek out funds with rolling returns that fluctuate less, since this indicates stability.
Evaluate Risk: While funds with consistent returns are probably more reliable, those with very variable rolling returns could be riskier.
Long-Term Planning: Make sure a fund is in line with your investing objectives by using rolling returns to evaluate how well it performs over extended periods of time.

Conclusion

A useful metric for assessing mutual fund performance is rolling returns. Rolling returns help investors understand how a fund performed over time by removing biases from set timeframes and emphasizing consistency. For long-term investment success and well-informed decision-making, they are therefore crucial.

Therefore, don't depend on historical performance or annualized returns the next time you assess a mutual fund.

Mr. Unmesh Deshmukh

Founder & Director, Bonvista Financial Services | AMFI ARN: 136656

With over 24 years of elite experience in the financial services industry, Unmesh is a seasoned investment expert. He acts with a strict fiduciary mindset, leveraging data-backed strategies to help individuals and families create sustainable, generational wealth.