When you are looking into investing in mutual funds, you will frequently see the phrase “trailing returns.” Despite its scientific language, this basic concept may provide you with important information about the historical performance of a fund. We’ll go over what trailing returns are, how they operate, and how to utilize them to improve your investment choices in this blog.
What Are Exactly Trailing Returns?
Trailing returns, which are calculated backward from a set date, reflect the amount that a mutual fund has made (or lost) over a given period. A fund’s 3-year trailing return as of right now, for instance, will show you how much it has increased (or decreased) from precisely three years ago to the present.
Trailing returns are typically calculated for different time frames, such as:
- 1-year trailing returns (%)
- 3-year trailing returns (%)
- 5-year trailing returns (%)
- 10-year trailing returns (%)
- Since inception returns (%) (the fund’s performance from its start date)
Trailing Returns are the overall return of the mutual fund, including changes in its Net Asset Value (NAV) and any dividends or capital gains received during the time, which are frequently shown as percentages.
Features of Trailing Returns
Trailing returns are an essential tool for investors looking to evaluate the past performance of their investments. Here are the key features that make trailing returns valuable
Measures Past Performance
A clear picture of an investment’s performance over a given time frame, like 1, 3, or 5 years, is given by trailing returns. This retrospective view helps investors understand the historical performance leading up to the current date.
Fixed Periods
The calculation of trailing returns is done over defined, fixed periods. This means that investors can easily see how an investment has performed over specific intervals, making it straightforward to analyze and compare.
Easy to Compare
One of the significant advantages of trailing returns is their simplicity in comparison. Investors can quickly assess and compare the performance of different funds or stocks over the same time frame, which aids in making informed investment decisions.
Expressed as a Percentage
Trailing returns are typically presented as percentages, making them easy to interpret. This format indicates how much an investment has gained or lost in value over the specified period.
Commonly Used by Investors
Trailing returns are widely recognized and utilized by investors as a standard method for assessing the recent performance of mutual funds and other investments. Their popularity stems from their straightforward nature and effectiveness in providing insights into past performance.
Simple Calculation
The calculation process for trailing returns is relatively uncomplicated, which contributes to their frequent use in mutual fund reports and performance summaries. Investors can easily understand how these returns are derived, facilitating better decision-making.
How to calculate Trailing Returns:
To calculate the % of trailing return of a mutual fund, the following formula is to be used:
- Trailing Return = (Current Value/Starting Value) ^ (1/Trailing Period) – 1
For example, if a mutual fund’s NAV is 150 on 01.12.2024, and 100 on 01.12.2021, then the 3-year trailing return would be:
- 3-year Trailing return = {(150/100)^(⅓)} – 1 = 14.47%
Why Are Trailing Returns Important?
Investors can assess a mutual fund’s past performance with the use of trailing returns. This is why they are important:
- Consistency: The trailing returns of a mutual fund across several periods might reveal whether or not it achieved results (delivered returns) that are consistently high or low.
- Comparison: To determine which fund has done better over a certain time frame, you may compare the trailing returns of various funds.
- Benchmarking: With the help of trailing returns, you may determine if a fund is outperforming or underperforming the market by comparing its performance to a benchmark index, such as the Sensex or Nifty 50.
How to Use Trailing Returns for Better Investing?
- Align Returns with Your Objectives:
- To assess current performance if you’re investing for the near future, consider 1 or 3-year trailing returns.
- To examine how the fund performs over lengthy periods, concentrate on 5-year or 10-year trailing returns for long-term objectives.
- Examine Results Throughout Market Cycles:
- A fund with consistent returns over time may be a sign of a talented fund manager who can handle shifting market conditions.
- Beware of funds that provide great short-term gains but mediocre long-term outcomes since they cannot be sustainable.
- You Should Not Depend Only on Trailing Returns:
- Although trailing returns offer insightful information, they only display historical performance. The state of the market, fund management, and other variables all affect future returns.
- Analyze trailing returns when combined with other tools like portfolio composition, expenditure ratios, and risk indicators like beta or standard deviation.
- Taking the Context into Account is important:
- Compare trailing performance to the fund’s investment goal and approach. For instance, while having erratic short-term returns, funds in the equity category may have greater long-term returns.
- Funds in the same category can be compared. For example, instead of comparing the trailing returns of large-cap funds with those of other categories, compare them with those of other large-cap funds.
Investors must avoid a few Common Mistakes, which are mentioned below:
- Chasing High Returns: Don’t pick a fund solely because it has high trailing returns. Consider if the performance is consistent and aligns with your risk tolerance.
- Ignoring Risk: High returns often come with higher risk. Look at risk-adjusted returns to ensure you’re getting compensated for the risk taken.
- Overlooking Fees: A fund’s returns are shown before or after deducting fees. Make sure you understand how expenses affect your actual returns.
Trailing Returns vs Annual Returns
| Aspect | Trailing Returns | Annual Returns |
| Time Frame | Varies (e.g., 1-year, 3-year, 5-year) | Fixed to one calendar year |
| Update Frequency | Updated regularly (often daily) | Calculated once per year after the year ends |
| Utility | Provides a current perspective on performance | Offers a historical comparison |
| Market Sensitivity | Reflects recent trends and changes | Shows performance for a specific year |
Trailing Return vs Rolling Returns
| Aspect | Trailing Returns | Rolling Returns |
| Calculation Type | Point-to-point return from a specific start date | Average annualized return across overlapping periods |
| Performance Insight | Snapshot of past performance | A comprehensive view of consistency and volatility |
| Use Case | Comparing funds over fixed timeframes | Assessing long-term suitability and resilience |
Conclusion
Although trailing returns are an effective technique for assessing mutual funds, a more comprehensive study should be conducted before using them. Always keep in mind that previous success does not guarantee future outcomes, so consider the whole picture.
To make well-informed judgments, consider trailing returns in conjunction with other elements such as your time horizon, risk tolerance, and investing objectives.
You may develop a portfolio that supports your financial objectives and get important knowledge about mutual funds by comprehending and utilizing trailing returns effectively.