Explained: What are rolling returns in mutual funds and why do they matter for investors?

When evaluating mutual fund performance, investors often rely on simple point-to-point returns. However, these can sometimes be misleading, especially if markets were unusually volatile during the selected period. This is where rolling returns come into play — a more comprehensive and consistent way to assess a fund's historical performance across multiple timeframes.

A rolling return is the average of a series of returns over a long period of times. It is the annualised return of any scheme taken for a specified time period.It can be rolled on a daily, monthly, or yearly frequency in the defined time-period. As compared to trailing returns, rolling returns is the best measure to analyse the performance of a fund.

Trailing returns have a recency bias and point-to-point returns are specific to the period taken for analysis. On the other hand, rolling return measures the fund's absolute and relative performance across all time periods without any bias.

Rolling returns gives a comprehensive picture of the performance by a fund. Due to different time periods involved, the return consistency of the fund over a defined time period can be analysed efficiently as it considers both upstream and downstream in the market.

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For example, if you calculate 3-year rolling returns for a mutual fund over 10 years, you'll look at returns for:

• Year 1 to Year 4
  
• Year 2 to Year 5
  
• Year 3 to Year 6
  ... and so on, until the end of the period.
  

This method helps smooth out anomalies and provides a clearer picture of how consistently a fund has performed over time.

Why are rolling returns important?

1. Eliminates bias: Unlike point-to-point returns, rolling returns avoid bias caused by selecting specific time frames (like peak or low market phases).
   
   
2. Shows consistency: They help gauge whether a fund has delivered steady performance or if returns are skewed due to a few good years.
   
   
3. Better comparison: Investors can compare different mutual funds more reliably using rolling returns, as it reflects performance across various market cycles.
   
4. Helps assess risk: It becomes easier to identify if a fund tends to underperform or outperform consistently, offering insights into its risk-return profile.
   
   

How to use rolling returns?

Investors can use rolling returns to:

• Compare funds in the same category: See which fund has consistently beaten its peers and benchmark.
  
• Understand volatility: Funds with highly fluctuating rolling returns may be riskier.
  
• Time your entry: Knowing historical patterns helps assess if it’s a good time to invest.
  
  

Example: If a fund's 5-year rolling return over the past 10 years has mostly stayed above 10%, it reflects strong consistency — a sign of good fund management.

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How to check rolling returns?

Most investment research platforms and mutual fund websites provide rolling return calculators or charts. These tools let you select time frames (1-year, 3-year, 5-year, etc.) and compare multiple funds. Here is how to calculate the rolling returns in excel.

Suppose you are investing in an ABC fund for a time period of five years as this time frame is the minimum horizon an equity investor should have. Note, the dates taken are just for example.

Step 1: Assuming an investor wants to test the five year returns of an ABC scheme over 15 long years. Start with the daily NAV of the scheme. The start date will be January 2, 2013 to January 2, 2018.

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Step 2: If you want to calculate a two -year rolling return for the scheme then start from 2015. Take NAV of January 2, 2013 and January 2, 2015.

Step 3: Again calculate returns if you start your investment on January 3, 2013 for five years. Move the date by one day i.e. January 3, 2013 and January 3, 2015.

January 2, 2013 - 100.83

January 2, 2015 - 160.22

Using CAGR formula = (160.22/100.83) ^ (1 / 2 ) -1

CAGR = 26.06%

Step 4: Calculate CAGR for the next set of dates

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Step 4: Now you have two year rolling returns, calculate the average of all the two year return

Step 5: The average obtained is rolling return for your mutual fund investments in a five year period rolled on a two year basis.

Rolling returns offer a more realistic and reliable view of mutual fund performance, helping investors make informed decisions. By focusing on long-term consistency rather than short-term spikes or dips, rolling returns empower investors to pick funds that are more likely to deliver sustainable returns over time.