Whenever you think of investing in mutual funds, the first yardstick that comes to mind to judge a fund is its returns in the short and long term. Many websites directly show you the ‘point-to-point return’ of a fund. That is, how much return was generated from this date to that date. But Radhika Gupta, MD and CEO of Edelweiss Mutual Fund, cautions against trusting the method.
She is of the view that analysing a mutual fund’s performance on the basis of trailing or point-to-point returns is not a good idea.
“Most websites that do MF analytics focus on discrete point-to-point returns. I have said time and again, this is a broken metric because one good year or bad year colours the entire history,” the mutual fund industry veteran said in a post on ‘X’.
According to her, what matters are rolling returns — they show how consistent a fund has been over time, not just at one point. They represent the experience a cohort of investors has had over 3 years or 5 years, she added.
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She says that the performance of any fund cannot be understood just from the data of a fixed period. The fund may have performed very well or very poorly during that period, due to which the entire story is lost.
Instead, she considers ‘rolling returns’ to be more accurate. Rolling returns show how stable and consistent returns a fund has delivered over a long period of time. It also reflects the experience gained by people investing at different times within three or five years.
In keeping with this philosophy, Edelweiss Mutual Fund has now added rolling return data to its fund pages. Now investors can not only view these figures but also analyse them to make better and more informed decisions for the long term, she added.
The Edelweiss Mutual Fund CEO hopes that other mutual fund platforms will follow this path and give investors better tools so that they invest by looking at consistency and reliability.
What is rolling return in mutual funds?
Rolling returns are a way of understanding the performance of a mutual fund, in which we do not just look at the earnings from a fixed date to a fixed date, but try to know what kind of returns that fund would have given if invested at different times.
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Suppose you are looking at rolling returns for 5 years between 2010 and 2020. This would mean that starting from every day (or month) of this 10-year period, the returns for the next 5 years will be calculated. This tells us how the fund has performed from time to time — not just on a single date, but over the entire period.
Trailing returns or point-to-point returns evaluate the fund only based on a specific time, in which the effect of recent rise or fall is more visible. But rolling returns balance these fluctuations and show a more permanent and reliable picture.
