Rolling Returns

Let’s dive in.

Mutual funds have hundreds of options. How do you choose? This is what we will be focusing on in this blog today.

Why does one invest their money? The answer is straightforward; Returns. Therefore, naturally, the best selection criteria would be to look at the returns any fund offers.

Types of returns:

Absolute Return
CAGR
Rolling Return

Note: We will be using the data of Tata Digital India Fund for example purposes.

Absolute Return

Formula: ((Current Value of Investment / Actual Investment)-1) * 100

As we can see above, time is not taken into consideration. Therefore, Absolute Return will show us the return of the Mutual Fund irrespective of time.

E.g.

Price at the start of the fund- Rs 9.94

Price today- Rs 38.83

Consider you had bought 1 unit at Rs9.94. What would be the absolute return at Rs38.83 ?

Absolute return = ((38.83/9.94)-1)*100 = 290.34%

Here we can see that we made a return of 290.34%. But the duration is unknown.

Remark: It is an overall view of returns without considering the duration. Lacks data for an educated decision.

CAGR (Compound Annual Growth Rate)

Formula: ((Current Value of Investment / Actual Investment) ^ (1/n)) – 1

n- Duration of the investment.

Here, we can see that there is a time component embedded in the formula.

CAGR will give you the average annualized return for each year of the investment.

E.g.

Data: Duration of Investment 3 years(8th Jan 2016- 8th Jan 2019)

NAV: 9.94/- & 14.46/- respectively.

CAGR= ((14.46/ 9.94) ^ (1/3))-1 = 13.31%

I.e. For the NAV to reach 14.46/- your investment at 9.94/- grew by 13.31% each year for 3 years.

Remark: It gives an average return of the fund each year for the duration of tenure.

Calculator

Rolling Return

Rolling return is the holy grail of returns. Rolling return will give a more accurate result. Why? Because it takes into consideration multiple timeframes. This property of rolling return makes it unbiased.

E.g.

Let’s compare timeframes not that apart from each other.

Timeframe 1: 1st Jan 2017 to 1st Jan 2020

CAGR: 19.55%

Timeframe 2: 30th March 2017 to 30th March 2020

CAGR: 11.9%

From the comparison, one can see the difference caused by a timeframe to the CAGR. To negate this bias Rolling Return
Therefore, we can say that rolling return can provide us with the consistency of the fund, not allowing the manipulation of a singular price rally.

Tip: Calculator to understand rolling return better play around with the calculator.

Remark: A rolling return is the ultimate treasure trove of unbiased information.