MF Unlocked: Which is better, rolling returns or trailing returns?

When it comes to investing in MFs people give high priority to the historical returns generated by the fund. However, that should not be the case. They must also consider other factors governing the funds’ performance such as risk. There is no doubt that returns, though historical, are one of the parameters to consider while selecting a fund. But there are three ways in which you can look at returns viz., absolute, trailing and rolling. So, which returns you should look at?

Absolute return of an MF is the return that a fund achieves over a period of time. This typically shows the appreciation or depreciation in MF value. Let's say you bought 1,000 units of Fund A for NAV (Net Asset Value) Rs. 10 and sold them at NAV of Rs. 30 after 5 years. So your absolute return would be 200 per cent.

Trailing returns are nothing but historic returns of a fund. In short, trailing returns just calculate point-to-point returns and then annualize it. This metrics is most used to select funds. Some examples of trailing returns are 1-year, 3-year and 5-year returns on a year-to-date basis. For instance, Fund A’s NAV is Rs. 30 today and you bought say 1,000 units of it 5 years back at NAV of Rs. 10, then your trailing returns would be 24.57 per cent.

Rolling Returns are returns calculated for overlapping periods for desired time horizon. For example, you wish to calculate 1-year monthly rolling returns for a time horizon of 5 years. Say, the 5-year period is from January 2014 to December 2018. So, while calculating returns, the first rolling period would be from January 2014 to December 2014, the next 1-year period would be February 2014 to January 2015 and so on till the last 1-year period of January 2018 to December 2018 and then annualizing all the returns. This can also be termed as holding period returns. Rolling returns is a more realistic way of looking at investment returns. For instance, a 5-year rolling return would show the best and the worst 5 years that the fund may have experienced.

So, while considering returns as a parameter for selecting funds rolling returns would be the practical one. With rolling returns, you even would be able to gauge how consistent are the returns generated by the funds and how it has been performing in the worst and the best situations.