Trailing returns or rolling returns: Which one to choose?

There are numerous ways in which an investor selects a mutual fund scheme, however; one parameter that is always considered is, returns. It plays a pivotal role in selecting a fund. Therefore, it is important to understand how to analyse this important parameter.

Broadly, returns can be analysed in two ways. One is trailing returns and the other is rolling returns. Trailing returns are dependent upon just two price points. So, a three-year trailing return means the difference between NAV of today and the NAV of three years ago is annualised. For example, if the current NAV of a mutual fund scheme is Rs 25 and its NAV three years ago was at Rs 10, the total return generated by the fund is 150 per cent, however, the annualised returns come to around 36 per cent.

In comparison to annualised returns, rolling returns are comprehensive in nature and every price point counts. Rolling return is the average annualised returns taken for a specified period for any chosen frequency, whether it is daily/weekly/monthly or any other period. For example, to calculate three-year daily rolling returns for a 10-year period, you will take three-year returns as of today, then three-year returns as of yesterday, then the day before yesterday, and so on, for the last 10 years and then, average them.

While comparing returns of different funds, rolling returns present a better picture than trailing returns. Trailing returns compare two discrete points and hence, don’t tell you what happened in between. However, rolling returns average numerous data points and thus, give you a more reliable picture.

For example, Nifty in the last three years has generated a return of around five per cent but if we take rolling returns of three years in the last 10 years, then it has generated an average return of 11 per cent.

Though past returns have no guarantee of future returns yet if you have to check past returns, check rolling returns.