How To Calculate Rolling Returns In Mutual Funds?
Do you think investing in Mutual Funds is tricky? Well, not really but when it comes to evaluating a fund's performance, knowing how to calculate rolling returns might come in handy. How? Let’s find out.
First things first, it is a very useful tool that tells you how well your funds have performed over different periods. Yes, it shows you the true picture of your fund's true potential at overlapping periods (Eg., 1 year, 3 years or 5 years) better than just looking at one-time returns.
In this guide, you will learn how to calculate rolling returns in the simplest way possible. Likewise, studying its importance and focusing on how it can help you make smarter investment decisions.
What is Rolling Return in Mutual Fund?
The rolling returns of mutual funds are an easy and fastest way to see how your investments have performed over different periods like 1 year, 2 years, three and so on. Now, here, instead of looking at one specific start and end date of a scheme, it reads the overlapping periods.
This reliability helps you understand how the fund is performing under various market conditions; that way, you can easily understand how your scheme is managed during volatile conditions. This is how you can smartly get to the futuristic idea about your fund's performance.
Now that you know what rolling returns are, let’s understand how you can calculate rolling returns for a mutual fund scheme.
How Do You Calculate Rolling Returns?
Calculating rolling returns might sound tricky but it’s quite simple. Here's how you can do it step by step:
Step 1: First Things First Pick a Date
You will have to first choose the starting date of your investment. Let’s say you want to start your investment from the 1st of April, 2025. Then, the annual returns of the previous five years will be considered to calculate rolling returns. After deciding on the starting date, it is time to select the time frame.
Step 2: Decide Your Time Frame
Let’s take a 3-year time frame to calculate rolling returns. You can choose your preferred time frame as well. Just make adjustments accordingly, so that you get accurate results. You can also take help of rolling returns calculator.
Before proceeding to the calculation part, let’s assume annual returns for each year from 2020 to 2024 are:
1st year (2020) = 8%
2nd year (2021) = 15%
3rd year (2022) = 9%
4th year (2023) = 17%
5th year (2024) = 14%
Step 3: Calculate Returns for a 3-Year Time Frame
Now, let’s calculate returns for the first 3-year time frame, from 2020 to 2022:
8%+15%+9%
= 32%/3
= 10.66% (Average return for the 1st frame of 3 years)
The second calculation will involve the years from 2021 to 2023:
15%+9%+17%
= 41%/3
= 13.66% (Average returns for the 2nd frame of 3 years)
Finally, the third round of calculation will involve the years from 2022 to 2024:
9%+17%+14%
= 40%/3
= 13.33% (Average returns for the 3rd frame of 3 years)
Step 4: Assessing the Rolling Returns
Rolling returns for each 3-year time frame are:
1st = 10.66%
2nd = 13.66%
3rd = 13.33%
As you can see, these returns show that the mutual fund scheme is growing at a stable rate. This means, if you invest in the fund now, you can earn good returns from the scheme.
(Note: These data are completely hypothetical. It’s not guaranteed that a mutual fund scheme will always grow, so carefully analyze your scheme choice. You can use a rolling returns calculator to get precise data.)
There will be drops and surges in average returns but the difference between them should be low. A low difference indicates stable returns.
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Applications of Rolling Returns
For investors, rolling returns are like a multipurpose tool. They can assess mutual funds in the following ways:
1. Performance Analysis
Calculating the rolling returns of a particular scheme tells a great deal about its consistency in giving better returns over a long course of time. You can spot the exact period during which the scheme was underperforming or in the red. This is a smart and easy process to identify a promising mutual fund scheme and save your hard earned money.
2. Optimizing Portfolio
You can compare different mutual fund schemes based on their rolling returns and choose the most profitable scheme among them. The optimization of your portfolio gets easy once you learn to calculate rolling returns with the help of a rolling returns calculator.
3. Strategy Improvement
Since rolling returns help you spot drops and increases clearly and you can readjust your investment strategy smartly. This whole process makes it easier for you to the best times to invest in mutual funds.
4. Setting Benchmarks
Traditional methods of returns such as annualized returns or trailing returns, are often not precise. They also don’t provide a comprehensive comparison. But rolling returns can help you set a benchmark and then compare different mutual fund schemes against that benchmark.
5. Managing Risks
With the help of rolling returns of mutual funds, you can make sure that your investments are not beyond your risk tolerance.
Must Read: Best SIP Plans for 1 Year: Grow Your Money Fast
What are the Benefits of Rolling Returns?
The following are the benefits of rolling returns that you should know:
- Helps you measure consistency of funds: With the help of rolling returns, you can see how your investments have performed over various time durations which tells you if the fund is giving stable returns or not and if there is a need to switch to better-performing funds.
- Can easily compare the performance: It allows you to do a side-by-side comparison of various scheme's performance. By doing so, you can identify if your fund is improving, underperforming, or giving steady returns over time.
- Checking risk made easy & quick: This method makes the whole process of spotting risk trends way easier. You can easily know if the fund is volatile or giving stable growth, which helps you plan an efficient strategy to pan out of risk.
Important Read: How to Make 1 Crore from SIP of Rupee 5000?
Moving on, it is important to weigh the pros and cons together with everything, so let's learn the limitations that can arise while calculating rolling returns in mutual funds.
Limitations while Calculating Rolling Returns of Mutual Funds
As they say, nothing is perfect. Rolling returns are also no exception. Certain factors limit the rolling returns from becoming the perfect method to assess mutual funds:
- Complex Calculations: You need to calculate returns at frequent intervals which is a complex and time-consuming market interval.
- Market Changes: Sudden market shifts, such as crashes or economic changes, can impact rolling returns and make them less reliable for future predictions.
- Lack of Insights: Rolling returns focus only on numerical data, without providing deeper insights into factors like fund management quality or market conditions.
Pro Tip: If you are new to investing focus on the consistency of rolling returns rather than just looking at the absolute numbers.
Summary: Key Takeaways
To sum up, rolling returns have so far helped investors find the most suitable and promising mutual fund schemes that have helped their SIP (Systematic Investment Plan) one way or the other. And it will keep doing so in the future as well. Just remember the following key points so that you can make profitable investment decisions:
- You must have clear investment goals, whether short or long-term goals. Assessing the rolling returns of mutual fundsis more suitable for long-term investment goals.
- Collect information related to fund managers and the AMCs as well, so that you can add qualitative insights into your decisions.
- Do not ignore market volatility and always make sure that the market is in favorable condition before investing.
Frequently Asked Questions
1. Why is rolling return a good way to assess mutual funds?
Rolling return is a good way to assess mutual funds because it helps you identify highly promising mutual fund schemes, compare returns across different time frames, and assess risks as well.
2. What is the difference between rolling returns and annualized returns?
Rolling returns can provide you with the average return of a mutual fund scheme over several overlapping periods, like months, years, etc. Whereas annual returns show the average annual return of a scheme only.
3. How to use rolling returns to compare different mutual fund schemes?
For comparison, you must choose the same rolling period for each mutual fund scheme. Carefully assess these funds’ annual returns and look for any inconsistencies. If a fund outperforms its benchmarks with better consistency than others, then that is the most profitable among all.
4. What are the risks associated with rolling returns?
Since calculating rolling returns can be complex sometimes and it also does not address sudden market shifts. Hence, you should not completely rely on rolling returns while assessing mutual funds. You can also gather information related to fund managers and investors’ behavior to identify promising funds.
