Investing can be a daunting task, especially if you're a beginner. While many measurements, concepts, and strategies exist, trailing and rolling returns are commonly used in investments. Whether you're a beginner or experienced, understanding trailing and rolling returns is important in analyzing past investment performance, determining market trends, and making informed decisions. So, let's discuss trailing and rolling returns in detail.

What are Trailing returns?

Trailing returns are the annualized returns that a mutual fund scheme offers over a specified period of time. Trailing returns measures an investment's point-to-point return. Trailing returns measure an investment's performance over a specific period leading up to the present. For example, a one-year trailing return reflects how much an investment gained or lost in the past year. In addition, Trailing returns give investors insights into historical performance, helping them assess the investment's track record and make informed decisions based on its past behaviour.

Features of Trailing Returns

1. Historical Performance Measurement

   Trailing returns reflect how an investment has performed over a specific period leading up to the present. Common trailing periods include one year, three years, or five years. It's like looking back to assess how well the investment has done recently.

2. Ease of Comparison

   Trailing returns make it easy to compare the performance of different investments over the same time frame. Investors can quickly see which investment has delivered better results during a specific trailing period, aiding decision-making.

3. Long-Term Assessment

   Trailing returns are particularly useful for evaluating an investment's long-term performance. Investors can understand how well the investment has weathered various market conditions by examining returns over multiple years.

4. Risk Assessment

   Analyzing trailing returns helps investors assess the volatility and risk associated with an investment. A consistent positive trailing return may indicate stability, while significant fluctuations could suggest higher risk.

5. Informing Investment Decisions

   Investors or traders use trailing returns to make informed decisions about purchasing, selling, or holding investments. It offers a historical perspective that can be easily valuable in predicting future performance based on past behaviour.

Example of Trailing Returns

Consider investing Rs. 1,000 in a stock. The one-year trailing return is then calculated as ((Value at the end of the year - Initial Investment) / Initial Investment) * 100, yielding a 20% return. After one year, Rs. 1,200 is worth investment.

Now, let’s calculate the trailing return for next year. It will be calculated ((Value at the end of the second year - Value at the end of the first year) / Value at the end of the first year) * 100, offering a 25% return. The investment grows to Rs. 1,500. Trailing returns provide a historical snapshot, aiding in assessing investment performance over specific periods.

What are Rolling Returns?

Rolling returns are annualized average returns for a specified period of time. Rolling returns measure an investment's performance over various overlapping periods, continually updating as each period ends. Instead of fixed time frames, like calendar years, rolling returns provide a dynamic view, assessing performance every 12 months within a more extended timeframe.

In addition, this helps investors understand how an investment performs under different market conditions and smoothens the impact of volatility.

Features of Rolling Returns

1. Dynamic Assessment

   Rolling returns offer a dynamic way to evaluate an investment's performance. Instead of fixed periods like calendar years, rolling returns of mutual funds consider multiple overlapping periods within a more extended timeframe. This dynamic assessment provides a nuanced view of how the investment fares across various market conditions.

2. Smoothing Market Volatility

   Investors can smooth out the impact of short-term market volatility by considering rolling returns. Fixed periods might capture extreme highs or lows, but rolling returns of mutual funds offer a more balanced perspective by continuously updating and considering multiple timeframes.

3. Flexibility in Analysis

   Rolling returns provide flexibility in analysis, allowing investors to assess performance over various durations. For example, you can look at rolling one-year returns, three-year returns, etc. This versatility helps understand the investment's performance in different market environments and adapt strategies accordingly.

4. Identifying Consistency

   Investors can use rolling returns to identify the consistency of an investment's performance. Consistent positive rolling returns suggest stability and may instil confidence in the investment's ability to weather diverse market conditions.

5. Realistic Expectations

   Rolling returns contribute to more realistic expectations. Instead of relying on a single snapshot of performance, investors can observe how an investment has historically behaved over rolling periods. This aids in setting expectations based on a broader and more continuous range of data.

6. Continuous Monitoring

   Rolling returns encourage continuous monitoring of an investment's performance. As each period concludes, the rolling return updates provide an ongoing assessment. This lets investors stay informed about how the investment adapts to changing market dynamics and make timely decisions.

Example of Rolling Returns in Mutual Funds

Calculating rolling returns is easy: Sum up the yearly returns over your chosen period (3 or 5 years) and divide by the number of years. Take the ABC Fund – if it yielded 6% from Mar 1, 2021, to Feb 28, 2022, that's the one-year rolling return. But it clocked in at 2% and 13% over the past two years.

Crunch the numbers (6+2+13/3), and the three-year rolling return is 7% annually. So, investors enjoyed an average 7% return each year, factoring in compounding and reinvested income. It's a simple way to gauge consistent performance over time.

The Bottom Line

Trailing and rolling returns are like two lenses through which investors can view an investment's performance. Trailing returns look back at fixed periods, providing a snapshot of historical performance, while rolling returns offer a dynamic, continuously updating perspective. Both methods help investors navigate the twists and turns of the financial landscape.

On the other hand, Trailing returns offer a straightforward historical assessment, while rolling returns give a more adaptable and comprehensive view like a constantly shifting window. Using these tools wisely, investors can make informed decisions based on a well-rounded understanding of an investment's past and evolving performance.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.