Annual vs Trailing vs Rolling Returns – Meaning, Calculation & Importance

Welcome to the world of financial wisdom. For investments, understanding the performance of a financial product is crucial for making informed decisions. Whether you are considering stocks, Mutual Funds (MFs) or any other investment options, one of the key aspects to evaluate is the Return on Investment (ROI). You will also come across complex terms like annual returns, trailing returns and rolling returns. Each of these metrics provide a different perspective of product performance. Let us explore financial growth, understand the meaning, calculation and importance of annual, trailing and rolling returns and shed light on how these metrics can help you make more informed investment decisions for a prosperous future.

Annual returns: unveiling the yearly performance

As the name implies, annual returns determine the performance of an investment product over a calendar year. It is a straightforward metric designed to assist investors in assessing the consistency of product performance by comparing returns of current year with previous years.

• Calculation:

The formula for calculating annual returns is simple. Take the Net Asset Value (NAV) or the investment price at the end of the current calendar year, subtract the value from the previous year and divide the change by last year's price. 

Example:

Let us illustrate this with a simple example. If we consider the NAV on December 31, 2021, subtracted by the NAV on December 31, 2020 and divided by the NAV on December 31, 2020, the formula becomes:Annual return = (NAV on December 31, 2021-NAV on December 31, 2020)/NAV on December 31, 2020.

• Significance:

The yearly examination of annual returns is instrumental in evaluating fund consistency and volatility across diverse market scenarios. Comparisons with fund benchmark or category average offer valuable insights into its relative performance within the market.

• Limitations:

While annual returns provide valuable insights into performance, they do have limitations. Notably, they may not fully capture the impact of compounding over an extended period. This limitation could potentially project an incomplete picture of overall fund performance, urging investors to consider additional metrics for a comprehensive evaluation.

Trailing returns: unravelling average annual performance

With trailing returns, you can understand fund performance between two distinct dates. The essence of trailing returns lies in measuring the average annual return over a specific period, providing investors with a compounded perspective. This metric bridges two dates, allowing investors to gain a more comprehensive understanding of the fund.

• Calculation:

Using the compounding formula, trailing returns are calculated as follows:

 Trailing returns = (current value/starting value) ^ (1/trailing period) -1

 Example:

Suppose you want to check the 3 year trailing return of a fund. If on January 3, 2022 the NAV is 54.58 and the NAV 3 years ago was 24.01, the calculation would be:

Trailing return = (54.58/24.01)^(1/31)-1=31.49%

• Significance:

Trailing returns offer a more comprehensive view of fund performance, enabling straightforward comparisons between different funds over a designated period. This metric becomes a valuable tool for investors seeking a more detailed understanding of the investment progress.

• Limitations:

Trailing returns, while informative, may not reflect fund consistency or volatility. Similarly, returns of two funds might not reveal which one is more prone to volatility, requiring investors to consider additional metrics for a holistic evaluation.

Rolling returns: embracing consistency over time

Rolling returns offer a more accurate picture to investors with a continuous and dynamic perspective on fund performance. Unlike their counterparts, rolling returns are calculated consistently over a specific period, offering a daily or fixed frequency perspective on fund performance.

• Calculation:

The rolling returns for a particular period are calculated by assessing the returns on each day within that period. For example, to calculate the 5 year rolling return for the period 2010–2020, you would assess the return on each day during this time frame. 

• Significance:

Rolling returns offer a comprehensive understanding of periodic fund performance, allowing investors to gauge the consistency and probability of earning specific returns over different investment periods.

• Limitations:

While rolling returns provide valuable insights, they do not account for market timing variations. Returns may vary significantly depending on the entry and exit dates, introducing a level of uncertainty.

Choosing the Right Metric for Informed Decision making

Each of these metrics - Annual returns, Trailing returns and Rolling returns serve a unique purpose. The choice of which metric to focus on depends on your investment goals and the insights you seek.

• Annual returns: Useful for assessing yearly consistency and volatility. Comparisons with benchmarks provide a snapshot of relative performance.

• Trailing returns: Helpful for understanding compounded returns between specific dates. Allows easier comparison between funds over a defined period.

• Rolling returns: Offer a daily or fixed frequency perspective providing insights into consistency and the likelihood of specific returns over various investment periods.

Wrapping up:

As you navigate the landscape of investments, remember that past performance does not guarantee future results. Utilise annual, trailing and rolling returns as important metrics in your investment plan. Considering them collectively to make more informed decisions could help you plan well with fixed income investments.

Understanding the concept of annual, trailing and rolling returns empowers investors to navigate the complex world of financial products, providing them with the insights needed to make sound investment choices aligned with their financial goals.