Yearly, Course, and Continuous Returns: Definitions, Methods, and Significance
In the world of investments, it's crucial to measure performance accurately. Three common methods for doing so are annual returns, trailing returns, and rolling returns.
Annual returns, as the name suggests, measure the return for a specific fixed financial year, such as the calendar year or fiscal year. They show how much an investment gained or lost during that year alone. While annual returns provide a snapshot of investment performance, they can be volatile and influenced by timing.
Trailing returns, on the other hand, measure the return over the past specified duration counting backwards from the current date. For instance, a 3-year trailing return shows the cumulative return for the last three years up to today. Trailing returns offer insight into medium- to long-term performance, smoothing out timing bias. They are useful to assess recent historical performance in aggregate.
Rolling returns calculate returns for moving, overlapping periods of a fixed length. For example, the one-year rolling return from January 2023 to January 2024, then February 2023 to February 2024, and so forth. Rolling returns give a more dynamic understanding of performance by analyzing returns over every possible sub-period in a timeframe. They reveal how consistent or volatile returns are, helping investors understand risk and potential variability in outcomes.
Using all three measures in combination helps investors get both a big-picture view (trailing), snapshot views (annual), and understand the stability and variation of returns (rolling). This comprehensive perspective is critical in evaluating investments beyond isolated periods and better informs timing and risk assessment for investment decisions.
For example, the 3-year trailing return of the Parag Parikh Flexi Cap Fund as of January 3, 2022, is 31.49%. Comparing these year-on-year annual returns with a scheme's benchmark or its category average gives a better idea about the fund's performance. The following table shows the annual returns of the Nippon India Small Cap Fund over the last 5 years:
| Year | Annual Return | |------|--------------| | 2017 | 64.41% | | 2018 | -15.61% | | 2019 | 1.19% | | 2020 | 30.88% | | 2021 | 74.36% |
Annual returns have limitations as they do not show the impact of compounding over a period. Depending on the date of investment and redemption, a fund's trailing return can change significantly.
Trailing returns help measure the average annual return between two dates using the compounding formula. For instance, the 10-year trailing return of the Quant ELSS Tax Saver Fund is 19.84%. The 10-year trailing return of the HDFC Taxsaver is 12.83%, while the Aditya Birla Sun Life Tax Saving Fund's 10-year trailing return is 14.95%.
Rolling returns help understand the probability of earning such returns for a future investment. They do not necessarily show the consistency or volatility of a fund. Trailing returns do not show the volatility of a fund's past performance.
In summary, understanding annual, trailing, and rolling returns is essential for making informed investment decisions. Each method provides unique insights into investment performance and risk, helping investors make more educated choices.
Mutual funds, such as the Parag Parikh Flexi Cap Fund, can have their performance evaluated using various methods, including annual returns, trailing returns, and rolling returns. Annual returns, while offering a snapshot of investment performance, can be volatile and may not accurately reflect the impact of compounding over a period.
Trailing returns, like the 10-year trailing return of the Quant ELSS Tax Saver Fund (19.84%), present the average annual return between two dates using the compounding formula, helping investors understand the potential for long-term growth.
Investing in personal finance, it's crucial to consider the stability and variation of returns, which can be understood through rolling returns. For instance, the one-year rolling return of a fund can give insights into its consistency and potential risks, which is important for risk assessment in the stock market.
