Daily Investment Words: Rolling Returns – Why is it crucial to investors?

Daily investment words: While investing in a variety of funds and financial instruments, it may often be necessary to track your investments to determine how your funds perform over a period of time. Rolling returns are such measures that help estimate the performance of investments over a certain period of time.

What is rolling returns?

Rolling returns, also known as rolling period gains or rolling periods, evaluate the average annual gains for a specific period, usually a week, month, or any other defined period. It helps analyze the performance of investments during different holding periods.

How does rolling returns work?

Rolling represents the average return experience of mutual fund investors over a period of time. It is calculated over a continuous period and reveals the true performance of the fund on different market conditions.

For example, the NIFTY50 Index Fund had an average rolling return of 14% between 2019 and 2024. This means that any investor investing in the three-year period between 2019 and 2024 has an average rate of return of 14%. It can be from January 1, 2019 to January 1, 2022, 2019 to January 2, 2022… and from January 1, 2022 to December 31, 2024.

Because they are considered over different periods, investors can measure the consistency of the fund.

Difference between rolling returns and CAGR

Although CAGR returns during fixed periods recover, the rolling returns show returns during overlapping periods – 1 year, 3 years or 5 years – on a rolling basis, volatility is captured over multiple periods.

Compared to CAGR, scrolling returns provide dynamic and accurate pictures by showing you investing on any day. Meanwhile, CAGR shows the return on the initial and final value of the investment over a period of time without estimating the volatility during this period.

Why are rolling returns important to investors?

Track the performance of investments

“Rolling returns are more precise and smoother than traditional peer-to-peer returns when evaluating the performance of an investment. Rolling returns track the performance of an asset or portfolio over a specific overlap interval (such as one, three or five years) and provide long-term performance metrics.

Time of investment

Another advantage of rolling returns is that you don’t worry about the timing of your investment.

Moria further said: “For example, assuming there is no other information, the fund’s returns seem incredible from January 2020 to January 2025. This is the case until people look closely and realize that at the end of the timeline, the markets are scrambling. If the fund has a major market rally at the end of the timeline, the returns do not accurately demonstrate the consistency of the fund.”

He added: “Rolliding returns mitigate the utilization of these differences, using a large number of starting and ending points, but helping investors understand how investments perform under different market conditions.”

The role of volatility and risk

Rolling returns help determine returns, volatility and risks associated with investment.

Funds with inconsistent, powerful peer-to-peer returns are not as reliable as funds with stable rolling returns. Mauria said investors, especially those who offer broad goals for future goals, like funds that continue to perform through different market cycles.

Rolling returns metrics help distinguish the best funds in the same category and avoid evaluating situations that may be affected by recent market peaks or troughs.

“For investors with a relatively long time frame, rolling returns can bring realistic performance prospects. Whether it’s shared funds, stocks or ETFs, rolling returns analysis can help buy tools whose value grows steadily over time rather than turbulence,” he added.

In summary, rolling returns are measures to assess investment long-term performance by providing a more consistent view of returns.