Rolling return charts have become prominent over the last few years, especially for mutual fund analysis. However, few investors understand how rolling return charts are computed and their benefits and limitations. A discussion.
Rolling lump sum, rolling SIP, and many other mutual fund and time series analysis and financial planning tools are available in the freefincal investor circle.
There are two popular ways to compute returns for a financial instrument that fluctuates:
Point-to-point returns: The effective annual compounded growth rate (CAGR) is calculated between two dates. You can calculate CAGR for your mutual fund and compare it with its benchmark from Jan. 1st to Dec 31st, or you can calculate CAGR for the year to date (last 365 days). So the start and end date can be anything convenient to us.
The trouble is that results depend on the start and end dates. Sometimes, the instrument will show excellent returns and sometimes poor. I can’t look at the last 3Y or 5Y return and assume that is how my experience will be after I invest.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
What we need to know before choosing a mutual fund, or more importantly before deciding to quit a mutual fund scheme, is how consistent the fund’s performance is when compared with its benchmark. To do this, we need to use Rolling returns.
Calculating Rolling returns: This helps me answer the question, “How has a fund or a stock or an index or a commodity performed over every possible 3Y (for example) duration in its history?”
For example, suppose data is available from 1st Jan 2000. Then the first possible 3Y window is from 1st Jan 2000 to 31st Dec 2002. The next possible period of the 3Y window is from 2-1-2000 to 1-1-2003 and so on, as shown below.
- 01-01-2000 to 31-12-2002
- 02-01-2000 to 01-01-2003
- 03-01-2000 to 02-01-2003
- …..
- 09-12-2020 to 10-12-2023
- 10-12-2020 to 11-12-2023
- 11-12-2020 to 12-12-2023
A rolling returns chart plots returns over all such time windows versus the start or end dates. Here is an example of 10-year rolling return data of several indices.
Each coloured line has 2262 data points (except the yellow line, which has more).
Suppose I am comparing the green line with the yellow line. The green could be a fund, and the yellow could be the benchmark. I can immediately, visually grasp how often or consistently the green has outperformed the yellow.
In our monthly equity mutual fund screeners, we quantify this outperformance consistently by computing the ratio of the number of periods the fund did better divided by the total number of periods.
Definition used in our fund reviews: Rolling return outperformance consistency: the fund returns are compared with category benchmark returns over every possible 3Y,4Y, and 5Y period from 1st Jan 2013. The higher the outperformance consistency, the better. Suppose 876 fund returns were compared with 876 benchmark returns, and the fund has beaten the benchmark 675 times. The consistency score will be 675/876 ~ 0.77 or 77%. A score of 1 means 100%.
This should not be interpreted as a probability of future outperformance!
The above is an example of rolling lump sum returns. You can also compute rolling SIP returns, rolling volatility (standard deviation), rolling alpha, upside capture, downside capture charts, etc.
This is an example of mutual fund analysis with rolling returns, rolling upside and rolling downside capture ratios: Mirae Asset Emerging Bluechip Fund: Performance Review.
Excel sheets for computing these charts (among other tools) for any mutual fund or index are available in the freefincal investor circle.
There is more to a rolling returns chart than return outperformance.
The first thing to notice is the time period studied or the x-axis window. The longer this window, the better the result. In the above graph, the window is only about 10 years. This means market history is short. So, we cannot take any of the inferences too seriously. This is a problem with almost all Indian market data.
When you have data for several decades, you can afford to plot and interpret better. For example, the stock market always moves up in the long term, but returns move up and down! The graph below spans over 90 years!
The most important aspect of a rolling returns chart is risk! We understand that the future is uncertain by looking at the spread of returns (max return to minimum return). We have no clue about future market returns! There are no guarantees. But there is a solution. See: Do not expect returns from mutual fund SIPs! Do this instead!
One should never take the average of a rolling return chart. This is because the data distribution is not a normal distribution (gaussian distribution or a bell curve), so the idea of an average is useless. See, for example, The distribution of stock market returns. Also, data in the middle of a rolling return sequence tends to have a higher weightage in the average than those near the start and end periods.
In summary, a rolling returns chart should primarily be used to appreciate risk via the spread in returns. They can used to ascertain outperformance consistency. However, the period studied is crucial. If this period is long enough, it reveals an investment truth that nothing outperforms or underperforms forever. Rolling returns should not be averaged, and its performance consistency should not be considered a probability of future performance.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)