Use this Excel based rolling returns calculator to evaluate the consistency in performance of your mutual funds and stocks by comparing them with their benchmark indices.
Returns for a financial instrument that fluctuate can be calculated in two ways:
Point-to-point returns: The effective annual compounded growth rate (CAGR) is calculated between any two dates. You can calculate CAGR for your mutual fund and compare with its benchmark from Jan. 1st to Dec 31st or you calculate CAGR for the year to date (last 365 days). So the start and end date can any thing convenient to us.
If we choose standard time durations (Jan. 1st to Dec. 31st or 1st/2nd/3rd/4th quarters) then it makes sense to use point-to-point returns for evaluating mutual funds or stocks with respect to their indices.
If we calculate point-to-point returns for the last 1/3/5 years then results will entirely depend on the end-date. That is, whether I choose the end-date of my 1/3/5 year period as today, last week or last month.
Trouble is many online resources (VR online, Money Control, Morning Star) prominently display such 1/3/5 year point-to-point returns misleading many investors. The end-date for such results is typically a few days before results are published. Such results cannot and should not be used for evaluating mutual funds.
What we need to know before choosing a mutual fund, or more importantly before deciding to quit a mutual fund scheme, is how consistent is the funds performance when compared with its benchmark. To do this we need to use Rolling returns
Calculating Rolling returns: To calculate rolling returns, we need to again decide a start-date and end-date. Let us say this is a 10 month period. We then calculate the percentage change in the funds NAV from day 1 (start-date) to day 7 (weekly return or IRR). We then calculate the weekly return from day 2 to day 8, day 3 to day 9 and so on until we reach the last date. We repeat this exercise for the benchmark as well.
If the all the dates in our NAV history and index history are identical then we could find out the number of weeks the fund has outperformed its benchmark. If say, the fund has beat its benchmark 75% of the all available rolling returns then fund could be rated ***** or something like that!
Rolling returns thus give you a measure of consistent fund performance between any two dates. One way to consistency is to check if the average of rolling returns for the mutual fund is higher than its benchmarks. The higher the better – it means the fund has beat the benchmark for more rolling intervals.
The standard deviation associated with the average of the rolling returns data gives you an idea of fund volatility when compared with its benchmark.
Point-to-point return calculations cannot give us an idea of consistency in performance and of volatility.
A crude example could perhaps illustrate this idea better: Imagine two couriers, A and B, who have been given the task of taking a consignment from point 1 to point 2 on either side of a steep mountain range.
- Courier A uses the road and goes around the mountain range.
- Courier B climbs the mountain range.
There are two ways I could evaluate actions of the couriers.
- The point-to-point approach: I ignore the journey details and only worry about the end result: Did the couriers complete their task successfully?
- The rolling returns approach: My consignment is important to me. So the path chosen by the courier is important to me. I study their paths and ask: which courier took the minimum risk while achieving his/her task?
Excel Rolling Returns Calculator
- You will need to input the NAV (or stock price) history of your mutual fund You can easily get this from Personalfn NAV history in excel format
- You will also need to input the benchmark history. These can also be obtained in excel format from the BSE site or the NSE site
- These sites will give the history in .csv file. You will need to arrange the entries in ascending order – earliest date is the first entry, and copy the entries into the rolling returns calculator page.
- I know these sounds like a lot of work. Believe me once you do it a couple of times, you will be quite comfortable with it.
- The calculator can handle 5000 NAV entries. So it is good enough for about 19 years or so!
- After you enter the NAV and index history, you need to choose the period for which you need the rolling returns analysis – 365 days (preferred choice for non-experts if you have data for at least 5 years), 90 days, 7 days etc.
- There is an analysis page where the results for the fund and its benchmark are compared.
- I have not included computation of number of periods the fund outperforms the benchmark. To do this the dates in the NAV and index history much match exactly. If you are interested in this, I will include this in a future version.
- I have included Franklin India Blue Chip NAV (my favourite mutual fund) and Sensex data as an example.
If you are an investor interested in evaluating mutual funds, please use the calculator and let me know if it was useful to you along with suggestions for improvement
If you are a finance professional, I would be much obliged if you could evaluate the calculator and let me know your impressions. Your feedback will be useful to everyone.
Update: Automated version is available
Download the Excel Rolling Returns Calculator (requires Excel 2007 or above. Let me know If you need it as a .xls file)
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