What are rolling returns in case of mutual funds? Why is this better than point-to-point returns?
This article discusses the concept of rolling returns and explains why investors should use them to choose investments like mutual funds.
What are rolling returns in case of mutual funds? Why is this better than point-to-point returns?
Posted on 08 Oct 2023
Author: Sayan Sircar
12 mins read
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This article discusses the concept of rolling returns and explains why investors should use them to choose investments like mutual funds.
📚 Topics covered:
- Why mutual fund return illustrations are misleading?
- What are rolling returns of a mutual fund?
- Where do we get the data for mutual fund rolling returns?
- Where do we use the concept of rolling returns?
- Why using rolling returns can be used to mislead investors?
Why mutual fund return illustrations are misleading?
Here is an example of a mutual fund that is currently (as of 5-Oct-2023 close) on the top of all performance charts:
This fund was specifically chosen since, as per Valueresearchonline data, this fund has given the highest 20-year returns, as of 5-Oct-2023, of all mutual funds in India.
Now in general you would have also seen mutual fund performance tables like this:
| Period | Lump sum | SIP |
|---|---|---|
| 1Y | 28.2% | 24.3% |
| 2Y | 16.1% | 18.5% |
| 3Y | 34.1% | 33.5% |
| 5Y | 19.3% | 19.1% |
| 7Y | 17.3% | 18.6% |
| 10Y | 21.4% | 18.4% |
| 15Y | 15.9% | 13.5% |
The above table shows point-to-point data for the period ending 5-Oct-2023. This means that the fund gave a return of 28.2% for a single lump sum investment made a year ago and redeemed on 5-Oct-2023.
Unfortunately, point-to-point data is not suitable for drawing any useful conclusion regarding the fund performance. We can choose the start or end dates to make any point we wish to. For example, here is the same point-to-point performance table for the same fund for the period ending 24-Mar-2020 which is the date the stock market reached a bottom due to the COVID-19 pandemic.
| Period | Lump sum | SIP |
|---|---|---|
| 1Y | -16.6% | -9.3% |
| 2Y | -9.0% | -11.6% |
| 3Y | -0.7% | 1.7% |
| 5Y | 2.4% | 3.7% |
| 7Y | 9.4% | 9.5% |
| 10Y | 8.3% | 9.1% |
Note: We have daily NAV data for this fund only since 2006 and therefore there is no 15Y data for 2020.
If you are a mutual fund distributor selling a fund to a client or a Do-It-Yourself (DIY) investor trying to understand the historical return of a fund, point-to-point data is useless.
We need a better metric to understand the historical returns of assets like mutual funds, stocks, gold, indices (like Nifty 50 or SENSEX or S&P500) or even real estate. That metric is called rolling returns.
What are rolling returns of a mutual fund?
Rolling returns are all of the returns that the fund gave for a particular investment period. If, for example, we wish to understand how much returns the fund usually gave for a 10Y lump sum investment, we can list down in a table or chart returns like this:
- invested on 1st Jan 2006 and sold on 1st Jan 2016 after 10 years and got a return of X%
- invested on 2nd Jan 2006 and sold on 2nd Jan 2016 after 10 years and got a return of Y%
- invested on 3rd Jan 2006 and sold on 3rd Jan 2016 after 10 years and got a return of Z%
and so on.
You can now plot these values like X,Y,Z% against the dates 1st Jan 2016, 2nd Jan 2016, 3rd Jan 2016 etc and create a chart like this:
If you are investing monthly i.e. in SIP mode, you can perform the same calculation for 120 months and create a chart like this:
Such charts are rolling return charts and give you a much better idea of the actual returns of the fund for the chosen investment period. For the same fund in the above example, we can create a complete rolling return dashboard like this:
Rolling returns allow us to better understand Lump sum and SIP returns like this:-
For lump sum:
| Period | Best | Median | Worst | Chance of return > 8% | Chance of return > 12% | Chance of losing money |
|---|---|---|---|---|---|---|
| Any 1y | 139% | 12% | -58% | 57% | 50% | 26% |
| Any 2y | 65% | 14% | -17% | 62% | 55% | 18% |
| Any 3y | 39% | 15% | -7% | 74% | 61% | 7% |
| Any 5y | 24% | 14% | 0% | 83% | 65% | 0% |
| Any 7y | 23% | 14% | 7% | 99% | 76% | 0% |
| Any 10y | 21% | 14% | 7% | 97% | 74% | 0% |
| Any 15y | 20% | 13% | 4% | 96% | 75% | 0% |
For SIP:
| Period | Best | Median | Worst | Chance of return > 8% | Chance of return > 12% | Chance of losing money |
|---|---|---|---|---|---|---|
| Any 1y | 119% | 12% | -55% | 56% | 50% | 26% |
| Any 2y | 52% | 14% | -17% | 65% | 54% | 17% |
| Any 3y | 38% | 16% | -5% | 76% | 59% | 7% |
| Any 5y | 25% | 14% | 0% | 84% | 63% | 0% |
| Any 7y | 21% | 13% | 7% | 100% | 82% | 0% |
| Any 10y | 19% | 14% | 8% | 99% | 69% | 0% |
| Any 15y | 15% | 14% | 13% | 100% | 100% | 0% |
Where do we get the data for mutual fund rolling returns?
We have a data set for rolling returns : What are the rolling returns of SIP and lump sum of direct mutual funds?
Where do we use the concept of rolling returns?
We have a good number of articles using the concept of Rolling returns for understanding the returns of different asset classes. Some of these examples are below:
-
What are the rolling returns of SIP and lump sum of direct mutual funds? (July 2024 edition)
This article provides a list of fund and category-wise statistics of rolling return of SIP and lump sum investments for various mutual funds.
-
Gold touched ₹75,000 per 10 gm. Should you buy gold or sell gold at this point?
This article explores the probabilities of gold price movement, both up and down, from current price levels.
-
Should you invest in hybrid funds via SIP for short-term goals?
This article shows you how different categories of hybrid funds have performed for regular SIP investments for short durations.
-
Best Investment Choices for US NRIs in Indian Stocks: a Rolling Returns Analysis
The article uses rolling returns to compare various investment options for US-based NRIs intending to invest in the Indian stock market.
-
How much Long-Term Wealth has been Built with Equity Investing in the US Stock Market?
This article explores how much return has come from the US stock market using data from the 1870s.
-
The lie of wealth-creation via SIP in mutual funds
This article shows you that investing via SIP in a mutual fund does not create wealth.
-
What will create a higher corpus for children's marriage: buying physical gold vs SIP in stocks
The article shows you if you there is a better alternative to buying gold over time for your child’s marriage goals.
-
The unknown risk in NPS that few people talk about
What should you do if there is a fall in your NPS corpus just before retirement at 60? This post details the problems and shows how to remediate the risk.
-
Markets are falling. Should you buy the dip?
This article talks about short-term changes to your investment strategy to take advantage of downward market movements. Does it work?
-
Should Indian investors invest in the permanent portfolio?
This article analyses if a permanent portfolio (equal proportion of stocks, bonds, gold and cash) works for Indian investors.
-
What is the best way to invest in gold?
This post answers the question of how and whether investors should include gold in their portfolios.
-
Should you invest in international stocks?
This post answers the question of whether investors should invest outside their home country.
Why using rolling returns can be used to mislead investors?
A common comparison in the mutual fund industry is comparing mutual funds and FDs. A recent take on this debate says: “Did you know that even the worst performing equity mutual funds has beaten FD. Imagine what the best performing MF has done.”
We examine that claim here: Do the worst performing equity mutual funds beat FD?.
Related Articles
- How do you measure the performance of an individual mutual fund?
- What are the rolling returns of SIP and lump sum of direct mutual funds? (July 2024 edition)
- Should Indian investors invest 100% in equity for their goals?
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