We all invest to generate positive returns, whether it be in stocks, gold, mutual funds, or another kind of asset. Therefore, the first thing we usually look for in an investment product is its historical return. On the other hand, there are many interpretations of return on investment. For example, you’ve probably seen terminology like annual returns, rolling returns, and trailing returns. You’ll never be able to compare investment products on an even playing field and choose the finest ones if you don’t know what each of these various return kinds means.
We will discuss the three most often used methods of calculating a product’s returns in this blog: Rolling, Trailing, and Annual. We’ll go over each one’s meaning as well as how it differs from the others. To maximize your investment returns, we will finally explain how to interpret these three different sorts of returns.
Annual Returns
As the name suggests, the annual return of an investment product indicates its performance for the calendar year. Therefore, if you examine the annual returns year after year, you may determine whether an investment product has consistently performed well. The best aspect is that calculating the annual return is a very easy task.
The investment price, also known as the NAV of a mutual fund scheme, must be determined at the close of both the current and prior calendar years. Subtract the price from this year by the price from the previous year. Next, divide the price change by the price from the previous year.
For example, let’s calculate the annual return of the HDFC Small Cap Fund 2023.
Annual Return = (NAV on Dec 31, 2023 – NAV on Dec 31, 2022)/ NAV on Dec 31, 2022
| NAV On Dec 31, 2022 | Rs. 79.78 |
| NAV On Dec 31, 2023 | Rs. 115.55 |
| Difference in NAV | Rs. 35.77 |
| Annual Return from HDFC Small Cap Fund in 2023 | 44.84% |
Like this, you can calculate the annual returns of any investment product annually. Let’s elaborate on the last example to show you how yearly returns might provide a reasonable indication of the overall performance of a mutual fund scheme.
The following table shows the annual returns of the HDFC Small Cap Fund over the last 5 years.
| Year | Annual Return of
HDFC Small Cap Fund |
Small Cap Fund Category Average |
| 2019 | -9.49% | -0.32% |
| 2020 | 20.17% | 32.05% |
| 2021 | 64.88% | 65.25% |
| 2022 | 4.59% | 4.19% |
| 2023 | 44.84% | 41.08% |
You can assess a fund’s volatility throughout a range of market conditions and have some insight into how consistently it performs by looking at the annual returns of the HDFC Small Cap Fund.
You may also get a better understanding of the performance of the fund by contrasting these yearly returns from year to year with the category average of the plan. The HDFC Small Cap Fund has beaten its category average in 2022 & 2023, as seen in the sample above.
Limitations Of Annual Returns
There are certain restrictions on the annual return as well. For example, a fund may outperform its benchmark / category in the majority of years. However, it is possible that the fund underperformed considering the overall period of investment. It occurs as a result of examining annual returns over several years. Furthermore, estimating net returns over time is challenging.
Put clearly, annual returns over several years do not demonstrate the effects of compounding. As a result, you are unable to view the return that a fund has accrued over time.
Let’s deeply understand this limitation with an example. Assume that the fund has performed in the following manner against its benchmark.
| Year | Fund Return | Benchmark Return |
| 2017 | 10% | 9% |
| 2018 | 4% | 3% |
| 2019 | -12% | -8% |
| 2020 | -23% | -7% |
| 2021 | 14% | 11% |
| 2022 | 14% | 12% |
| 2023 | 35% | 20% |
Prima facia, you see that the fund has beaten its benchmark almost in all years except 2019 & 2020. So according to you, the fund should have outperformed its benchmark. But when you calculate the return, the fund is actually underperforming its benchmark.
If you had invested Rs. 100 in the fund at the start of 2017, it would have grown to Rs. 136 by 2023. On the other hand, if you had invested in the benchmark index, the same Rs. 100 would have grown to Rs. 143 by 2023.
Hence, when comparing the net returns of various investment options over a longer period of time, annual returns fail to paint a clear picture. This is the point at which trailing returns become relevant.
Trailing Returns
Unlike Annual Returns, Trailing returns will help you assess the average annual return between two dates (for a particular period). Here, we can use the compounding formula for calculation purposes.
Trailing Returns = (Current Value/Starting Value) ^ (1/Trailing Period) – 1
Let’s see with an example.
Say, today’s date is February 9, 2024. You want to check the 3-year trailing return of the PPFAS Flexi Cap Fund. Here’s how the trailing return calculation works:
NAV on Feb 9, 2024= 68.85
NAV 3 years ago, i.e., NAV on Feb 9, 202 = Rs. 38.00
Absolute Return = (68.85 – 38.00)/(38.00) = 81.18%
3-year Trailing return = {(68.85/38.88)^(⅓)} – 1 = 21.91% (Using compounding formula)
This way, the trailing return indicates a return between two dates (covering the total period of investment), which is the more appropriate way.
Trailing returns of the fund can give you a clearer picture than Annual Returns.
However, the trailing return also has certain limitations. Let’s understand these limitations.
Limitations Of Trailing Returns
Trailing returns present a point-to-point return and assess performance across an independent period. Because of this, the trailing return of a fund could not fairly represent its consistency or volatility.
The volatility of a fund is not shown by the trailing returns. The volatility of the two funds might differ even if they have provided an average yearly return of 10% over the past ten years. However, it is impossible to comprehend the volatility of the fund’s historical performance by simply glancing at the trailing returns.
Furthermore, the timing of your investments and withdrawals will have a big impact on your trailing return. This is a result of how equities markets operate. You may enter during a rally and then depart during a decline, or vice versa.
Rolling Returns
As per the definition, the Rolling returns are calculated for a particular period continuously (or fixed frequency). Simply put, it is like calculating trailing returns daily.
Let’s understand with an example. For example, we want to know the 5-year return of a Mutual fund over the 10 years between 2013 to 2023. So, the rolling return would mean calculating the 5-year return on each day during this period.
You need to calculate the 5-year return as of 1st January 2013, 2nd January 2013, and so on till 31st December 2023. It will show you a spread of returns had you invested on any day during this period (i.e. from 2013 to 2023) for 5 years.
One of the main benefits of rolling returns is that you can see what sort of returns the fund has generated throughout the duration you intend to invest in it by examining the range of returns. You can also comprehend the potential of obtaining these kinds of returns in the future.
Also Read – How Rolling Returns are Different than Normal Returns
Which is better? Annual Return Vs Trailing Return Vs Rolling Return
The annual, trailing, and rolling returns all have unique characteristics. Thus, they can serve a variety of functions. The annual return and rolling return, for example, might help determine how volatile or consistent a fund performs. Although the trailing return might not display these elements, it is helpful to illustrate how compounding affects returns.
In conclusion, as an investor, you should not be only focused on a particular return. You would be losing sight of the larger picture if you were to concentrate just on the rolling, trailing, or annual returns.
However, as an investor of Mutual Funds, if you want to have a fair idea of the scheme’s past returns over a given period of time (continuous basis), then rolling returns are more important than trailing returns.