Money Tip # 2

Always check Rolling Returns of Mutual Funds instead of point to point returns

When we select a mutual fund for investment, past returns of the fund play important role in our decision. However one common mistake most of us do is we make decision based on point to point returns. I think rolling returns would help more.

What is Point to point returns?

Basically when we see details of mutual fund in their advertisement or websites like valueresearchonline or moneycontrol, by default generally we see what is referred here as point to point returns. Why it is called so? This is because they are between just two dates (or points). Today is say 26th July 2020. So 1, 3 , 5 year returns shown are for period 1 year, 3 years or 5 years before today. This is just one data point of return. This may give us misleading indication based on situation today and on that those days. Just think. Is it correct to make decision about a fund which may be here for say 15 years, based on just one set of data?

What is Rolling Returns?

Let us understand with an example. Let us say HDFC Equity Fund started on 1st Jan 1995. Today is 26 July 2020. Let us take situation where we want to invest in this fund for 7 years and want to know how generally it performs over 7 year period. In point to point returns, we will get just one return which is 26 July 2013 to 26 July 2020. In rolling return, what we see is how fund performed in every seven year period. Its like this we will see the returns from 1st Jan 1995 to 1st Jan 2002, 2nd Jan 1995 to 2nd Jan 2002….till 26th July 2013 to 26th July 2020. So we see literally hundreds of situations as how fund performed over seven years. This will give us better insight on fund behavior – Average , minimum, maximum, probability of returns during this period. Don’t you feel this is much better way to analyze past performance of fund.

Where will I get Rolling Returns of Mutual Fund?

There are multiple places. Website that I use is Advisorkhoj. You can click on the link. Select the category of your fund and then enter fund that you want to check. You can also add multiple funds and check their rolling returns at same time. Select the date from which you want to see rolling returns and period of rolling return. Along with graph, it also gives a table with Average , minimum, maximum returns during selected period. It also tells consistency of each set of returns. That should be able to give you better confidence for setting your expectations.

How many years of rolling returns we should check?

There are multiple options from 1 month to 15 years. Ideally you should select the period in line with your goal of investment. If your investment is expected for 5 years, select that period. If goal is retirement planning and its long way away, select 15 years. But do play around with different periods to see volatility of fund. This will let you understand if you have stomach for negative returns intermittently.

Credits – Thanks my friends Darshan and Keerthi for helping me do better research of Mutual Fund Returns.

3 thoughts on “Money Tip # 2”

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