Explained: What are rolling returns in mutual funds and how do you calculate them?

Rolling returns in mutual funds refer to the method of evaluating a fund's return over a specific period by calculating the compounded annualized growth rate (CAGR) at regular intervals, such as daily, monthly, or yearly. This approach provides a more comprehensive and accurate reflection of a fund's performance and consistency over time as compared to trailing returns that only capture performance up to a single point in time.

Rolling returns eliminate bias and offer a balanced assessment of how a fund has performed across various market conditions.

To calculate rolling returns, one must first gather the daily Net Asset Value (NAV) of the fund. For instance, if an investor is interested in analyzing a five-year period, the start date would be January 2, 2013, and the end date would be January 2, 2018. Next, the investor should determine the desired rolling period, such as a two-year rolling return. In this case, the analysis would begin from January 2, 2015, by comparing the NAVs on January 2, 2013 and January 2, 2015.

The investor would then calculate the CAGR for this period using the formula:

CAGR = (Ending Value / Beginning Value) ^ (1 / Number of Years) - 1

Continuing with the example, the CAGR would be calculated as:

CAGR = (160.22 / 100.83) ^ (1 / 2) - 1 = 26.06%

The same process would be repeated for each subsequent one-year interval, moving the date forward by one day each time. Once all the rolling returns have been determined, the investor can calculate the average of all the two-year rolling returns to obtain the rolling return for the mutual fund investments over the five-year period, rolled on a two-year basis.