Trailing Returns vs Rolling Returns in Share Market

When analyzing mutual fund performance, understanding returns is crucial for making informed investment decisions. Two important metrics used to gauge mutual fund returns are Trailing Returns and Rolling Returns. Both of these metrics serve different purposes in evaluating past performance, and each offers unique insights. Trailing returns show how well a fund has performed over specific intervals, while rolling returns provide a broader view of consistency over time.

In this article, we’ll dive deep into the differences between trailing returns and rolling returns, how to calculate each, and when to use one over the other. We’ll also provide historical data and tables to illustrate these concepts in the context of the Indian share market.

What are Trailing Returns?

Trailing returns refer to the total return of a mutual fund over a specific period, such as 1 year, 3 years, 5 years, or 10 years, ending on the most recent date. It shows how a fund has performed over these timeframes but does not consider how consistent the performance has been throughout the period.

Calculation of Trailing Returns

Trailing returns can be easily calculated using the following formula:

Trailing Return=((End Value−Start Value)/Start Value)×100

The start and end values are the NAV (Net Asset Value) of the fund at the beginning and end of the period.

Example of Trailing Returns (Table)

Period	Start NAV	End NAV	Trailing Return (%)
1 Year	100	115	15%
3 Years	85	115	35.29%
5 Years	75	115	53.33%
10 Years	60	115	91.67%

Benefits of Using Trailing Returns

Easy Comparison: Trailing returns are simple to calculate and allow easy comparison of fund performance over similar periods.
Snapshot of Performance: They give a quick snapshot of how a mutual fund has performed over specific timeframes.
Quick Decision-Making: Ideal for short-term analysis and decision-making when evaluating a fund’s past performance.

Limitations of Trailing Returns

Does Not Reflect Consistency: Trailing returns only provide a point-to-point performance snapshot and ignore fluctuations or volatility.
End-Date Sensitivity: The result can vary dramatically depending on the chosen end date, especially during volatile market periods.

What are Rolling Returns?

Rolling returns provide a more comprehensive view of fund performance by calculating the returns for overlapping periods within a specific timeframe. Instead of using just the start and end points, rolling returns examine how the fund performed over multiple intervals within a given period.

For example, to calculate 1-year rolling returns for a 10-year period, you would compute the return for every 1-year period starting at each day within the 10-year window.

Calculation of Rolling Returns

The formula for calculating rolling returns is similar to trailing returns, but the main difference is that it averages the returns across multiple periods.

For instance, to calculate 3-year rolling returns, you would calculate the 3-year return from each day over a larger window (like 10 years).

Example of Rolling Returns (Table)

Period	Rolling Return (%)
1 Year Avg	14.5%
3 Year Avg	12.8%
5 Year Avg	15.3%
10 Year Avg	16.1%

Benefits of Using Rolling Returns

Measures Consistency: Rolling returns provide a better view of a fund’s consistency over time.
Less End-Date Bias: Since rolling returns calculate returns at multiple intervals, they smooth out the volatility that can be caused by a single end date.
Better for Long-Term Investors: Rolling returns are ideal for assessing how well a fund has performed in the long run across various market conditions.

Limitations of Rolling Returns

Complex Calculation: Rolling returns are harder to calculate manually, as they require more data points and computation.
Overwhelming for Short-Term Analysis: Since it focuses on consistency, it may not be as useful for investors looking at short-term market trends.

Trailing Returns vs Rolling Returns: Key Differences

Feature	Trailing Returns	Rolling Returns
Purpose	Snapshot of past performance	Evaluates consistency over time
End-Date Sensitivity	Sensitive to the chosen end date	Minimizes end-date bias
Usefulness	Good for short-term analysis	Better for long-term consistency assessment
Calculation Simplicity	Easy to calculate	Requires more data and complex calculations
Volatility Reflection	Does not reflect mid-period volatility	Accounts for volatility across the entire period

When to Use Trailing Returns

For short-term investments: If you’re considering mutual funds for short-term goals, trailing returns give a quick snapshot of how a fund has performed in recent years.
Performance comparison: Trailing returns are helpful when comparing funds based on specific time periods, such as 1 year, 3 years, or 5 years.

When to Use Rolling Returns

Long-term investment evaluation: For long-term investors, rolling returns provide a much better indication of the fund’s consistency over time.
To smooth out volatility: Rolling returns offer a more comprehensive picture for those concerned about market volatility affecting their returns.

Historical Data: Indian Mutual Funds Example

To illustrate the differences between trailing and rolling returns, let’s consider two mutual funds: Fund A and Fund B. Below is the 10-year performance data for these funds based on both metrics.

Trailing Returns Comparison (Table)

Year	Fund A (%)	Fund B (%)
2023 (1 Yr)	10%	12%
2022 (3 Yr)	8%	10%
2021 (5 Yr)	14%	13%
2020 (10 Yr)	18%	16%

Rolling Returns Comparison (Table)

Year	Fund A (Avg %)	Fund B (Avg %)
1 Yr Avg	9.5%	11%
3 Yr Avg	10.8%	9.6%
5 Yr Avg	14.3%	13.2%
10 Yr Avg	17.1%	16.8%

From these tables, we see that Fund B shows better trailing returns in the short term, but Fund A shows more consistency in rolling returns, especially over longer periods.

Which Metric Should You Rely On?

Both trailing returns and rolling returns have their uses, and which one you should focus on depends on your investment goals and timeline.

For short-term goals or recent performance insights, trailing returns are useful as they give a snapshot of how well the fund has performed recently.
For long-term investments, rolling returns provide a much more accurate reflection of consistency, allowing you to evaluate how well a fund has navigated market ups and downs.

In general, financial advisors recommend using rolling returns for long-term investments as they offer a more comprehensive view of the fund’s ability to generate consistent returns over time.

Conclusion

Understanding the difference between trailing returns and rolling returns can help you make better decisions when investing in mutual funds. Both metrics provide important information, but rolling returns generally give a clearer picture of a fund’s long-term performance. For short-term analysis, trailing returns serve as a helpful metric to evaluate recent performance.

By knowing when to use each metric, you can ensure your investment decisions are well-informed, and you can choose funds that align with your financial goals.