For novice investors contemplating mutual fund investments, the allure of attractive returns across different schemes can be enticing. However, understanding the nature of these returns is crucial, as they fall into two main categories: trailing returns and rolling returns.
**Rolling Returns:**
Also referred to as rolling time period returns, these are the annualized average returns calculated for each day within a specific timeframe. Regardless of the day you choose to invest during this period, the rolling returns remain consistent. Examining rolling returns provides insight into how a scheme performed over the entire duration.
For example, if a fund showcases a rolling return of 10 percent over a five-year period, it implies that an investment made at any point within this period would yield an equivalent annual return of 10 percent upon selling the investment at the end of five years.
**Trailing Returns:**
Trailing returns represent the annualized returns of a mutual fund scheme over a designated period, computed from one point in time to another. These returns measure the point-to-point return from the start to the end of a specific investment period.
For instance, if an initial investment of ₹100 grows to ₹161 at the end of the fifth year, the absolute return is ₹61, resulting in an annualized return of 10 percent per annum for each of the five years. Trailing returns are distinct from rolling returns as they fluctuate based on the specific entry and exit points of the investment.
**Choosing an Indicator of Performance:**
Wealth advisors argue that rolling returns offer a superior indication of a mutual fund’s performance over time, especially when evaluating a scheme primarily based on historical performance.
Unlike trailing returns, which depend on specific entry and exit dates to achieve a given Compound Annual Growth Rate (CAGR) return, rolling returns provide a more comprehensive view of a scheme’s past returns over a specified timeframe. Consequently, for a fair assessment of a mutual fund’s historical performance, examining the fund’s rolling returns is considered more insightful than relying solely on trailing returns.
