Summary of this article
Rolling Returns show how consistently a fund performs
Rolling returns is a better
Best mutual funds are the ones that deliver good returns on a consistent basis.
Most investors look at trailing returns to select mutual funds. They invest in the funds which are at the top in terms of trailing returns in recent time periods. But that is not the right way to select mutual funds, because trailing returns fail to capture consistency. Trailing returns calculate returns from one point of time to another point of time. So, the 1-year return of Fund A would show how much a fund has grown or fallen from exactly 1 year ago. It fails to capture the fluctuations in between. So, if a fund trailing return seems high, it may be due to an exceptional performance during a specific time period. Thus, a fund with high trailing returns today may not be a consistently good performer. That is where ‘Rolling Returns’ came into the picture.
What is Rolling Return?
The best mutual funds to invest in are the ones that have delivered good returns on a consistent basis. The funds that have been able to sail through all types of market cycles without much volatility. You can find such funds by looking at the rolling returns.
A rolling return is the average of a series of returns over a long period of time. You can understand it like a daily SIP for a certain interval, and then take an average of the series of returns.
What is the benefit of using rolling returns? The average that is used in the case of rolling returns is based on a large sample size. And as we have studied in the chapter ‘Probability’ during school time, the higher the sample size, the higher the probability of the same happening in the future.
Let’s understand with an example. We calculated 5-year Rolling Returns of the Nifty 50 over the last 10 years, from October 2015 to October 2025, rolled on a daily basis.
In simple words, we calculated 5-year returns that the Nifty 50 has given in all possible five-year periods that existed from October 2015 till October 2025.
Rolled on a daily basis means that we calculated the five-year period from every single day for the period under consideration.
In our example, the first 5-year period was from October 1, 2020 to October 1, 2015. The next three days were non-working days. So, the second 5-year period was from October 5, 2010, to October 5, 2015. The third 5-year period started from October 6, 2010, till October 6, 2025, and so on..
The last 5-year period started from September 30, 2020, to September 30, 2025.
Going by this, we have 2,465 — 5-year periods from October 2015 to October 2025.
The returns for all these five-year periods were calculated, and when we take an average of all these 2,4654 instances of returns, it comes out to 13.28 per cent, which is what is known as the 5-year rolling return of Nifty 50 from October 2015 till October 2025, rolled on a daily basis.
Returns can be rolled on a weekly and monthly basis as well.
Rolling Returns: A Detailed Analysis of Mutual Fund Returns
Apart from the average return, rolling return gives us a lot more information about the performance of the fund. It shows the number of times the fund has given positive returns or negative returns, the maximum and minimum returns delivered by the scheme. You can also find out the number of times the mutual fund has outperformed inflation.
Like, in our example, rolling returns data gave the following information as well:
The highest 5-year returns in these 2,465 instances stood at 26.26 per cent, whereas the lowest return was negative 1.03 per cent.
Out of over 2,465 instances. Nifty 50 turned negative only twice. The benchmark index delivered returns less than 5 per cent only 2.08 per cent of the time.
Median returns stood at 13.49 per cent.
80 per cent of the time Nifty 50 index delivered returns over 10 per cent.
32 per cent of the time, the index delivered returns over 15 per cent in the 5-year period in the 10 years from October 2015 to October 2025.
3 per cent of the time, the index has delivered over 20 per cent returns in the five-year period.
Rolling Returns: How to compare a Mutual Fund?
Rolling returns can also be used to compare a fund to that of another fund or to the index. This tells about how consistently the fund has performed well as compared to the index, or vice-versa. The table below shows a comparison between the rolling returns of ICICI Pru Large Cap Fund vs the large-cap index Nifty 50.
It is clear that the fund fell less compared to the benchmark in terms of negative returns. Also, since the fund has consistently outperformed the index over five-year periods.
We have used the ICICI Pru Large Cap Fund only for illustration purposes. Don’t treat it as our recommendation.
Though the future is unpredictable and there is no guarantee of repetition of the past performance, since rolling returns are based on a large sample size, they can definitely give you an idea about the probability of happening in future.
