Determining whether your fund is performing well or not can seem to be such a daunting task. And it is! Analysing more than 40 unique characteristics of schemes, more than 25 categories of schemes in a universe of 600+ schemes can be quite a challenge to comprehend. We are starting a new blog series, which we hope will help you understand few of the characteristics that reveal a lot about your scheme and its desirability in your portfolio. And this brings us to the wiki for the day -
We understand returns right? Something worth 100 today, and 110 a year later gives a return of 10%. Most often our analysis of the scheme starts and ends at what has been the historical return of the scheme over the last 1 year/3 years/5 years. It's not a bad place to start. But it's also important to understand the context of the performance. There are so many factors that can affect the static performance of the scheme.
If you had looked at the performance of funds in 2009, you would have thought the world is coming to an end. Similarly, had you looked at the performance in 2015, you would have made the mistake of thinking every investment gives a return of more than 30%!. It's not enough to look just at the historical returns but also to understand the consistency of those returns. And that's exactly what rolling returns are all about:
1 Year returns = Absolute returns over last one year (The conventional definition of returns)
1 Year Rolling Return = 1 Year returns calculated on a daily basis
In short, 1 Year Rolling returns are nothing but a time series of 1 Year returns calculated daily. When you plot the rolling returns, it gives a nice visual chart which can help understand how much one can expect the scheme to perform for a period of one year. Here's an example of 1 year rolling returns of HDFC Mid-cap Opportunities Fund since 2014. As you can see from the chart, the annual returns of the scheme have varied from +100% to -13%, with a lot of ups and downs that are characteristic to mid-cap schemes. So even though an investor may feel thrilled with the 35% returns from last year, they can expect a whole lot of volatility over a period of time.
For the sake of further understanding, let us look at another example - ICICI Money Market funds. The chart clearly shows how the money market fund returns have dipped over last year (even though they are still better than FDs).
A note of caution though - There are many parameters that impact the returns of a scheme. Especially for Debt schemes, there are huge variations in scheme performance even within the same category. However, a look at rolling returns can guide us in the right direction and set expectation for returns from a particular scheme. We'll talk a whole lot about other characteristics such as Average maturity, AUM, etc in the coming posts. For now, you can play around with this cool chart we've published just today in the performance section of the schemes.
In a nutshell:
What are they - Rolling returns are time series of historical returns
Why you should care - They help understand the consistency of returns of a fund to help us calibrate our expectation from the scheme.
What they are not - They are not predictors of future performance. Neither do give the full understanding of scheme portfolio. But they help build a range of expectation for future performance
Hope this helps