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  • Sunil Subramaniam

    MD & CEO, Sundaram Mutual Fund
    Sunil Subramaniam is the CEO of Sundaram Mutual Fund. After studying at the prestigious IIT Madras, he held various responsible positions at SBI and American Express, among others. His favourite book is the Seven Habits of Excellence by Stephen Covey.

Here’s a better tool to judge mutual fund performance than simple 1-year, 3-year returns

While the one-year returns are absolute, the returns of higher periods are annualised.

ET CONTRIBUTORS|
Apr 16, 2019, 12.19 PM IST
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Rolling returns give you a reasonably reliable estimate of returns that you can expect from a fund as you have a large sample of returns.
One invests in mutual funds to earn potentially higher returns than those in traditional investment products, and I’m sure everyone looks at the one-year, three-year, five-year, 10-year and since inception returns of a fund before investing.

What do these returns tell you? These returns tell you how much the fund has delivered in that particular time-frame from a start date to an end date. While the one-year returns are absolute, the returns of higher periods are annualised. So, if a fund’s 10-year return is 13.2 per cent, it has delivered an average yearly return of 13.2 per cent over 10 years. It could have delivered 23 per cent in Year One, 9 per cent the next, maybe even negative returns during this time frame.

How then do you judge a fund’s performance? We look at rolling returns.

What are rolling returns?
Rolling returns average out a series of returns over overlapping periods. For example, take a three-year series starting April 1, 2003 for 15 years. In these 15 years, investors would have seen both bull and bear markets. We calculate returns from April 1, 2003 to March 31, 2006; April 2, 2003

to April 1, 2006; April 3, 2003 to April 2, 2006 and so on, and the average of all these returns give you the rolling returns.

If you look at the one-year rolling return of Sensex on a daily basis from September 2003 to 2018, you’ll see that in a seven-year period, you’ve earned positive returns 100 per cent of times, and beyond a seven-year period, there is zero probability of negative returns.

For those who can’t take on too much risk, stretch your timeframe to an extent that the chances of making negative returns diminishes. Of course, if you reach your goal earlier, exit the market.

Benefits of rolling returns
Rolling returns give you a reasonably reliable estimate of returns that you can expect from a fund as you have a large sample of returns. One can expand the scope of this to look at what is the lowest return, the highest return and the average return that a fund has given in a given period, and this data would allow you to manage expectations from your fund.

It is a probabilistic tool, but there is no bias toward any time period. This makes it an effective way of evaluating the performance of mutual funds.

Being prepared is half the battle won. Ask your advisers for rolling returns of funds, and use these to make pessimistic, realistic and optimistic projections of expected returns. This way, you’ll have an idea of what you can expect on an average, but you’ll also be prepared if your fund’s performance goes sideways.

Do remember though that past returns cannot be replicated, and mutual funds are always subject to market risk.


(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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