Investment word of the day: Rolling returns – Why is it crucial for investors? | Mint

Investment word of the day: While investing in various funds and financial instruments, a need may often arise to track your investment in order to determine how your money is performing over a period of time. Rolling returns is one such measure that helps to estimate the performance of an investment at a certain period of time.

What are rolling returns?

Rolling returns, also known as rolling period returns or rolling time periods, assess the average annual returns for a specific period, which is typically a week, month, or any other defined period. It helps to analyse the performance of an investment over different holding periods. 

How do rolling returns work?

Rolling represents the average return experience of a mutual fund investor over a period of time. It is calculated for a continuous period and reveals a fund’s true performance across different market conditions.

For instance, the 3-year average rolling return of a Nifty50 index fund is 14%, over a period of 5 years between 2019-2024. It means any investor who invested for a three-year period between 2019 and 2024 in this fund earned an average return of 14%. It can be any 3 years – 1 Jan 2019 to 1 Jan 2022, 2 Jan 2019 to 2 Jan 2022… and 1 Jan 2022 to 31 Dec 2024.

Because they factor in different periods, investors can gauge how consistent the fund is. 

Difference between rolling return and CAGR

While CAGR measures return over a fixed period, rolling returns show returns over overlapping periods – 1-year, 3-years or 5-years- on a rolling basis, capturing fluctuations over multiple periods.

Compared to CAGR, rolling returns provide a dynamic and accurate picture by showing how an investment would have performed if you had invested on any given day. Meanwhile, CAGR shows returns on the basis of the initial and final value of the investment over a period of time, without estimating the fluctuations during that time.

Why are rolling returns important for investors?

Tracking the performance of an investment

“In evaluating the performance of an investment, rolling returns are a more precise and fluid metric than traditional point-to-point returns. Rolling returns track the performance of an asset or portfolio over specific overlapping intervals, such as one year, three years, or five years, and provide longer-term performance metrics,” according to Siddharth Maurya, Founder & Managing Director of Vibhavangal Anukulakara Private Limited.

Timing of an investment

Another advantage of rolling returns is that there is no concern about the timing of the investment.

Maurya further said, “For instance, assuming no other information is given, a fund’s returns from January 2020 to January 2025 appear to be incredible. This is the case until one looks closer and realizes that towards the end of the timeframe, the market rallied dramatically. If the fund had a significant market rally towards the end of the timeframe, the return does not accurately demonstrate how consistent the fund was.”

“Rolling returns mitigate these discrepancies where numerous start and endpoints are utilized, and instead aid investors in understanding how an investment performs under varying market conditions,” he added.

Role of volatility and risks

Rolling returns helps to determine returns, volatility and risks associated with the investment.

A fund with inconsistent, strong point-to-point returns is not as reliable as a fund with steady rolling returns. Investors, particularly those with extensive objectives for the future, prefer funds with consistent performance through different market cycles, Maurya stated.

The rolling return metric helps to differentiate between best-performing funds in the same category and avoids cases where assessment may be influenced by recent market peaks or troughs.

“For investors with relatively longer time horizons, rolling returns give realistic performance prospects. Be it mutual funds, stocks, or ETFs, rolling returns analyses aid in purchasing instruments whose value goes up steadily over time instead of being volatile,” he added.

In conclusion, rolling returns is a measure to evaluate the long-term performance of investments by providing a more consistent view of returns over time.