Why Rolling Returns Matter More Than Point-to-Point Returns in Fund Analysis

Investment analysis methods often determine fund performance evaluation, significantly impacting our perception of an asset’s potential. Many investors rely on point-to-point returns, measuring performance based solely on the value at two distinct points in time. This approach gives an incomplete and sometimes misleading picture. Then, there are rolling returns, a more dynamic method that offers a holistic view of how an investment behaves over different periods. 

By considering overlapping periods, rolling returns illustrate how consistent and volatile an investment is and allow investors to identify the risk more effectively. It will provide an in-depth look into the importance of rolling returns, how they are more effective than point-to-point calculations, and why they matter more within the fineness of the fund’s performance.

Understanding Rolling Returns: A Deeper Insight into Performance Measurement

Understanding rolling returns is just seeing how an investment holds up over various periods rather than at the start and the end of a given time frame.

For example, You wish to calculate the rolling return of an XYZ Mutual Fund, which was launched in January 2000, and you want to calculate it every month for 5 years.

In this case, If someone has invested on 1 January 2000 and waited for 5 years, which ends on 1 January 2006.

Similarly, if he invested on 1 February 2000, the return will be calculated for 5 years, which ends on 1st February 2007.

Let’s understand this concept with another example.

Take an investment in a mutual fund for 10 years. Rather than considering the return from year 1 to year 10, you can consider rolling returns.

You can, for instance, consider

– Year 1 to Year 5

– Year 2 to Year 6

– Year 3 to Year 7

– Go on like this from Year 6 to Year 10

This approach gives you a better idea of the fund’s performance in various market conditions, averaging the extremes and providing a more complete picture over time.

This implies that rolling returns assist in understanding the consistency and risk of the investment. One can see how often the investment offered good or bad results in different circumstances. This will guide one in making wiser decisions about where to spend money. Rolling returns are a performance measure that looks beyond just one start and end point to give one a much better and more precise view of how an investment performs over time.

Understanding the Limitations of Point to Point Returns in Investment Analysis

Measuring the gains or losses in investment analysis based on point to point returns indicates the increase or loss in the value of an investment from the start date to the end date. However, it has several disadvantages.

It fails to take into account what happens between those two points. For example, it may have fluctuated wildly during that time but ended up at a value equal to when it started; point-to-point return could then give an unfairly positive or negative view.

It then disregards the timing of the cash flow. If money is invested incrementally over time or withdrawn, returns can differ from those of a no-money-added-and-no-money-withdrawn scheme.

The final problem that point-to-point return methods may have is they oversimplify performance. The risk or the volatility of such investment becomes very difficult to determine and may not reflect real life when used to predict future behaviors.

In summary, point-to-point returns have their uses but do not accurately portray a particular investment. It is usually better to consider other measures that incorporate variability and timing.

Comparing Rolling and Point to Point Returns: Pros and Cons

Now, let’s evaluate some of the major advantages and disadvantages of point-to-point returns and Rolling returns.

Rolling Returns:

These measure the average return over a specified time and are updated regularly. For instance, you could examine the returns over the last three years, move forward a month, and check again for the new three-year period starting next month.

Pros:

• Reduces the shock of large upward and downward market spikes.
• Calculates an average over time.
• Provides more insight into overall market performance over time.

Cons:

• Rolling returns can be misleading when concentrating on a specific moment.
• They do not accurately reflect the current situation but instead represent a time in the past.

Point-to-Point Returns:

These only examine the return from one particular date to another, such as how one investment fared from January 1st to December 31st of that same year.

Pros:

• Ease of Computation
• It provides a clear view of performance over that precise period.

Cons:

• An abnormal occurrence within the one period it spans distorts an otherwise fair idea of overall performance.
• Trends and shifts happening beyond those days it tracks won’t be found here.

Rolling returns over time will offer you a big-picture view. Point-to-point returns provide a snapshot. They can only choose, depending on the goal, if it’s trying to look for trends overall or if a particular moment should be more apparent.

How Rolling Returns Provide a More Accurate Picture of Fund Performance

This method brings out a much more precise and comprehensive view of a fund’s continuity and how the fund behaves differently in various types of markets. For example, suppose you evaluate a fund using its five-year performance history. In that case, you may miss how such a fund performed in individual yearly performances or trends during market reversals. Rolled returns help give you a peek at every year’s performances while considering factors from previous years that affected their results.

This way, investors are better positioned to know how reliable the fund is because of the presence of patterns or trends. It helps people understand risks and returns in depth to better decide what’s a good place to spend money.

Key Factors Influencing Rolling Returns and Their Importance in Investment Strategy

Rolling returns describe the performance of an investment over specific periods moving in perpetuity. Key influencers on such returns are as follows: 

• Market Environment: The general market condition can impact an investment’s performance; good market conditions commonly have much better returns.

• Investment Term: Longer holding periods tend to smooth out short-term fluctuations.

• Asset Mix: This is how you diversify your investments in various assets. It impacts both return and risk.

• Economic Indicators: Interest rates and inflation can impact investment performance.

• Management Fees: Lower fees improve overall returns by reducing costs.

• Diversification: Spreading investments across various assets can minimize risk.

• Behavioral Factors: Investor emotions can lead to poor decisions, which is why a good strategy is needed.

Understanding these factors can help investors create strategies to enhance rolling returns and achieve their financial goals.

Also, Check – What Are Trailing And Rolling Returns

On a parting note…

The importance of rolling returns in fund analysis cannot be overstated. While point-to-point returns provide a clear and straightforward view of investment performance over a particular period, they do not account for the entire context and variability that may impact an asset’s true potential. Rolling returns are more elaborate because they analyse performance across overlapping periods and help investors better assess consistency, risk, and volatility. 

The resulting outlook on trends and patterns can assist in making intelligent investment decisions since that might otherwise be unknown. By incorporating rolling returns into their analysis, investors can understand their investments much better and make wiser and more rewarding choices in the long term. 

Please share your thoughts on this post by leaving a reply in the comments section. Contact us via phone, WhatsApp, or email to learn more about mutual funds, or visit our website. Alternatively, you can download the Prodigy Pro app to start investing today!

Disclaimer – This article is for educational purposes only and does not intend to substitute expert guidance. Mutual fund investments are subject to market risks. Please read the scheme-related document carefully before investing.