
- The Problem with CAGR
- Enter Rolling Returns: A Clearer Picture of Performance
- How can we Interpret Rolling Returns?
- Why Rolling Returns Matter
- Final Thoughts
When evaluating mutual funds, investors are often bombarded with various performance metrics. While terms like annual returns and Compound Annual Growth Rate (CAGR) are commonplace, a lesser-known but arguably more insightful metric is the rolling return. This article will break down the different types of returns, explain the significance of rolling returns, and illustrate how they can help you make more informed investment decisions.
The Three Musketeers of Mutual Fund Returns
Before we delve into the specifics of rolling returns, let's quickly define the three primary ways returns are presented:
- Annual Returns: This is the most straightforward metric, showing the percentage change in an investment's value over a single calendar year. It provides a snapshot of a fund's performance on a year-by-year basis.
- CAGR (Compound Annual Growth Rate): CAGR represents the average annual growth rate of an investment over a specified period, assuming that the profits are reinvested. It smooths out the volatility of returns, providing a single, easy-to-understand number that reflects the investment's growth over time.
- Rolling Returns: Also known as Point-to-Point returns, this metric calculates the average annualised return of a fund over a series of overlapping periods. This method provides a more comprehensive view of a fund's performance across various market cycles.
Most investors stop at the first two. However, if you're serious about selecting the best fund, not just the one that appears promising on paper, then rolling returns are what you should understand.
The Problem with CAGR
Imagine you are considering two mutual funds, Fund A and Fund B. Both proudly display a 10-year CAGR of 15%. At first glance, they appear to be equally good investments. However, what if you were told that Fund A has a volatility of 20%, while Fund B's volatility is a more modest 16%? Suddenly, Fund B seems like the more prudent choice.
This is where the limitation of returns, such as CAGR, becomes apparent. CAGR only considers the starting and ending values of an investment, ignoring the intermediate values. It doesn't capture the fluctuations and volatility experienced during the investment period. A fund might have a stellar CAGR due to a few exceptional years, but it could have also experienced significant downturns, which a simple CAGR figure would mask.
Enter Rolling Returns: A Clearer Picture of Performance
This is where rolling returns come to the rescue. By analysing a fund's performance over multiple overlapping periods, rolling returns provide a more robust and insightful assessment of its consistency and risk. They help to smooth out performance data and offer a more comprehensive view of an investment's historical behaviour.
Let's illustrate this with the Parag Parikh Flexi Cap Fund. The image below shows the daily Net Asset Value (NAV) of the fund.
Parag Parikh Flexi Cap Fund NAV | ||||
Date | Direct NAV | 1 years Returns | 3 years Returns | 5 years Returns |
1/1/2015 | 16.2594 | 9.05% | 13.85% | 11.33% |
1/2/2015 | 16.3896 | 7.51% | 13.36% | 11.27% |
1/5/2015 | 16.3987 | 7.19% | 13.46% | 11.28% |
1/6/2015 | 16.042 | 9.46% | 14.47% | 11.51% |
1/7/2015 | 15.9459 | 8.39% | 15.00% | 11.73% |
1/8/2015 | 16.085 | 7.25% | 14.86% | 11.57% |
1/9/2015 | 16.1482 | 6.07% | 14.72% | 11.65% |
1/12/2015 | 16.1654 | 5.62% | 14.78% | 11.67% |
1/13/2015 | 16.202 | 4.61% | 14.67% | 11.63% |
1/14/2015 | 16.1434 | 3.62% | 14.93% | 11.87% |
1/15/2015 | 16.266 | 1.79% | 14.68% | 11.76% |
1/16/2015 | 16.2718 | -1.69% | 14.58% | 11.79% |
1/19/2015 | 16.3404 | -0.74% | 14.54% | 11.79% |
1/20/2015 | 16.461 | -2.15% | 14.23% | 11.60% |
1/21/2015 | 16.422 | -1.81% | 14.53% | 11.62% |
1/22/2015 | 16.4925 | -1.09% | 14.50% | 11.56% |
1/23/2015 | 16.5457 | -0.57% | 14.58% | 11.57% |
1/27/2015 | 16.5044 | -0.36% | 14.72% | 11.61% |
1/28/2015 | 16.4665 | -0.41% | 14.74% | 11.50% |
1/29/2015 | 16.4071 | 1.13% | 14.85% | 11.51% |
1/30/2015 | 16.3233 | 2.07% | 14.88% | 11.79% |
2/2/2015 | 16.3279 | 1.69% | 14.71% | 11.76% |
2/3/2015 | 16.2575 | 1.16% | 14.81% | 11.83% |
2/4/2015 | 16.2352 | 0.73% | 14.38% | 11.73% |
2/5/2015 | 16.1287 | 1.49% | 14.06% | 12.29% |
2/6/2015 | 16.0507 | 1.70% | 13.56% | 12.48% |
2/9/2015 | 16.0053 | 1.29% | 14.05% | 12.60% |
2/10/2015 | 15.9399 | 0.93% | 14.43% | 12.78% |
To calculate the 5-year rolling returns for this fund over a 10-year period from January 1, 2015, to December 31, 2024, we would do the following:
Step 1:
Calculate the return for the first 5-year period: January 1, 2015, to January 1, 2020.
- Start Date: January 1, 2015
- Start NAV (Direct): 16.2594
- End Date: January 1, 2020
- End NAV (Direct): 27.8018
We use the CAGR formula to find the annualised return for this period:
Return = ((Ending NAV / Starting NAV)^(1 / Number of Years)) - 1
Return = ((27.8018 / 16.2594)^(1 / 5)) - 1
Return = 11.34%
Step 2:
Then, we "roll" forward by one day and calculate the return for the next 5-year period: January 2, 2015, to January 2, 2020.
- New Start Date: January 2, 2015
- New Start NAV (Direct): 16.3896
- New End Date: January 2, 2020
- New End NAV (Direct): 27.9504
Return = ((27.9504 / 16.3896)^(1 / 5)) - 1
Return = 11.28%
Step 3:
We continue this process for every single day until we reach the last possible 5-year period in our 10-year timeframe, which would be from a date in 2020 to a date in 2024.
Step 4:
After calculating the returns for all 1,260 periods, we take a simple average of all these individual return figures. This final number is the average 5-year rolling return. This average gives a much more reliable indication of the fund's performance over time, smoothing out the impact of starting on a particularly good or bad day.
This process would generate a large number of 5-year returns. By taking the average of all these individual returns, we arrive at the 5-year rolling return for the fund over the 10 years.
How can we Interpret Rolling Returns?
Rolling returns help assess a fund’s consistency by showing how it has performed across overlapping periods, such as 1-year, 3-year, or 5-year intervals, throughout its history. Unlike point-to-point returns, rolling returns smooth out short-term market noise and reveal how frequently the fund has delivered strong, average, or weak performance. This helps investors understand whether the fund is a steady performer or prone to significant swings.
1 Year | 3 Years | 5 Years | |
Minimum | - 21.19% | 0.46 % | 4.18% |
Median | 17.98% | 18.09% | 19.07% |
Maximum | 32.03% | 17.82 % | 32.84% |
% times -ve returns | 11.80 % | 0.00 % | 0.00 % |
% times returns 0 - 8% | 19.02 % | 3.11 % | 3.65 % |
% times returns 8 - 12% | 5.86 % | 11.74 % | 7.16 % |
% times returns 12 - 15% | 7.05 % | 23.90 % | 7.46 % |
% times returns 15 - 20% | 17.15 % | 16.77 % | 36.48 % |
% times returns > 20% | 39.13 % | 44.48 % | 45.25 % |
Why Rolling Returns Matter
By examining rolling returns, you can gain valuable insights that other metrics might miss:
- Consistency of Performance: Rolling returns reveal how consistently a fund has performed across different market cycles, including both bull and bear markets. A fund that consistently delivers steady returns is often preferable to one with a history of dramatic swings.
- Risk Assessment: The range of rolling returns, the difference between the highest and lowest returns, is a good indicator of a fund's volatility. A wider range implies higher risk.
- Informed Decision Making: By understanding a fund's historical performance in greater detail, you can make a more informed decision that aligns with your risk tolerance and investment goals.
Final Thoughts
In conclusion, while annual returns and CAGR have their place in mutual fund analysis, they don't tell the whole story. For a more comprehensive and nuanced understanding of a fund's performance and risk profile, it is essential to look at its rolling returns. This powerful metric can help you see beyond a single number and choose funds that have consistently demonstrated long-term performance.
Disclaimer: The content is meant for education and general information purposes only. Past performance is not indicative of future returns. This in no way is to be construed as financial advice or a recommendation to invest in any specific stock or financial instrument. The Company strongly encourages its users/viewers to conduct their own research, and consult with a registered financial advisor before making any investment decisions. Mutual Funds are non-exchange traded products, and INDstocks is merely acting as a mutual fund distributor. All disputes with respect to distribution activity, would not have access to the exchange investor redressal forum or arbitration mechanism. Mutual Fund investments are subject to market risks, read all scheme related documents carefully before investing. INDstocks Private Limited (formerly known as INDmoney Private Limited) 616, Level 6, Suncity Success Tower, Sector 65, Gurugram, 122005, SEBI Stock Broking Registration No: INZ000305337, Trading and Clearing Member of NSE (90267, M70042) and BSE, BSE StarMF (6779), AMFI Registration No: ARN-254564, SEBI Depository Participant Reg. No. IN-DP-690-2022, Depository Participant ID: CDSL 12095500, Research Analyst Registration No. INH000018948 BSE RA Enlistment No. 6428.