Why should you check rolling returns before investing in mutual funds?
Rolling returns can be defined as annualised average returns over a certain number of years. Many experts opine that rolling returns could be one of the best measures of a mutual fund’s performance.
- These can be used before you decide to invest in mutual funds.
- Rolling returns, which are also known as rolling time periods or rolling period returns, are quite helpful when it comes to mutual fund investment.
- You can compare rolling returns of mutual funds before making mutual fund investments.
- Rolling returns of mutual funds are highly concentrated on the holding period of mutual funds and not on entry and exit time.
- Mutual fund rolling returns are evaluated at regular intervals on a relative and absolute basis signifying that these returns focus on categorising returns basis time intervals.
- The evaluation process of rolling returns of mutual funds considers time intervals of 3/5/10 years for examination of performance.
Calculation of rolling returns for mutual funds
One of the primary reasons why this method is used to compute is because of its sensitive and dynamic nature. For mutual fund investment, they help to provide a transparent picture. The calculation is done as follows:
- Finalising total time period or calculation of rolling returns for mutual funds
- Locking in the interval period – 3, 5, or 10 years
Let us look at an example for clear understanding:
The time period of 15 years is to be calculated at a 5-year interval starting from 1st April 2000.
Calculation of rolling returns for mutual funds would happen between:
- 1st April 2000 and 31st March 2005
- 1st April 2005 and 31st March 2010
- 1st April 2010 and 31st March 2015, so on and so forth
Importance of calculating such returns
Imagine you place your bet on a batsman based on his one-time exceptional performance. That may not be an ideal decision as the bottom line is about consistency. The same is the case with rolling returns of mutual funds. They proactively assist fund managers and investors in getting a better overview of performances.
- They use interval periods, which can provide details of the lowest, average, and highest returns accrued by a particular fund.
- Investors could get a better insight into market conditions before making a mutual fund investment.
- Since it’s conducted in regular intervals, the analysis of fund performance tends to become more accurate with time.
- There is no bias involved at any point as the calculation is spread out over a time period.
Rolling returns help to compute the mean to give us a report on the goodwill of a mutual fund. While some funds tend to give out better results at some point to investors, in the long term, it is more about consistent performance.