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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
10 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.

What are rolling returns in case of mutual funds? Why is this better than point-to-point returns?

📚 Topics covered:

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:

Lifetime NAV chart for Nippon India Growth fund

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.

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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:

Sample 10-year lump sum rolling returns

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:

Sample 10 year SIP rolling returns

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 for a fixed SIP distribution of Nippon India Growth fund as on 2023-05-10

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 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:

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?.

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This post titled What are rolling returns in case of mutual funds? Why is this better than point-to-point returns? first appeared on 08 Oct 2023 at https://arthgyaan.com


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