Annual vs. Trailing vs. Rolling Returns – Key Differences and Meanings

Welcome to the world of financial wisdom. For investments, understanding the performance of a financial product is crucial for making informed decisions. Whether you are considering stocks, Mutual Funds (MFs) or any other investment options, one of the key aspects to evaluate is the Return on Investment (ROI). You will also come across complex terms like annual returns, trailing returns and rolling returns. Each of these metrics provide a different perspective of product performance. Let us explore financial growth, understand the meaning, calculation and importance of annual, trailing and rolling returns and shed light on how these metrics can help you make more informed investment decisions for a prosperous future.

What are Annual Returns?

The annual returns tell you how much an investment has grown over a calendar year. It helps investors track how consistently a mutual fund or stock performs year after year. By comparing annual returns across different years, you can identify patterns, performance streaks, or sudden changes due to market events.

Calculation

Annual return is calculated using the Net Asset Value (NAV) or price at the beginning and end of a year:

Annual Return = (NAV at end of year – NAV at beginning of year) / NAV at beginning of year × 100

Understand it with an example :

Suppose the NAV on December 31, 2024, is ₹74.90 and on December 31, 2023, was ₹62.00.

Annual Return = (74.90 – 62.00) / 62.00 × 100 = 20.81%

Significance

The yearly examination of annual returns is instrumental in evaluating fund consistency and volatility across diverse market scenarios. Comparisons with fund benchmark or category average offer valuable insights into its relative performance within the market.

Limitations

While annual returns provide valuable insights into performance, they do have limitations. Notably, they may not fully capture the impact of compounding over an extended period. This limitation could potentially project an incomplete picture of overall fund performance, urging investors to consider additional metrics for a comprehensive evaluation.

What are Trailing Returns?

Trailing returns give you the annualised return of an investment over a specific past period, such as 1-year, 3-year, or 5-year. Unlike annual returns, they don’t follow calendar years but give you a real-time snapshot of how a fund has performed between two dates.

Calculation

Trailing Return = [(Current NAV / Starting NAV) ^ (1 / Number of Years)] – 1

Understand it with an example:

If on July 1, 2025, the NAV is ₹105.00 and 3 years ago (on July 1, 2022), the NAV was ₹60.50:

Trailing Return = (105.00 / 60.50) ^ (1/3) – 1 = 20.41%

This means the fund delivered an average annualised return of 20.41% over the last three years.

Significance

Trailing returns offer a more comprehensive view of fund performance, enabling straightforward comparisons between different funds over a designated period. This metric becomes a valuable tool for investors seeking a more detailed understanding of the investment progress.

Limitations

Trailing returns, while informative, may not reflect fund consistency or volatility. Similarly, returns of two funds might not reveal which one is more prone to volatility, requiring investors to consider additional metrics for a holistic evaluation.

What are Rolling Returns

Rolling returns offer a more accurate picture to investors with a continuous and dynamic perspective on fund performance. Unlike their counterparts, rolling returns are calculated consistently over a specific period, offering a daily or fixed frequency perspective on fund performance.

• Calculation: The rolling returns for a particular period are calculated by assessing the returns on each day within that period. For example, to calculate the 5 year rolling return for the period 2010–2020, you would assess the return on each day during this time frame. 

• Significance: Rolling returns offer a comprehensive understanding of periodic fund performance, allowing investors to gauge the consistency and probability of earning specific returns over different investment periods.

• Limitations: While rolling returns provide valuable insights, they do not account for market timing variations. Returns may vary significantly depending on the entry and exit dates, introducing a level of uncertainty.

Difference Between Annual, Trailing, and Rolling Returns in Mutual Funds

Difference between Trailing and Rolling Returns

Below are the key differences between trailing returns vs rolling returns:

Choosing the Right Metric for Informed Decision making

Each of these metrics - Annual returns, Trailing returns and Rolling returns serve a unique purpose. The choice of which metric to focus on depends on your investment goals and the insights you seek.

• Annual returns: Useful for assessing yearly consistency and volatility. Comparisons with benchmarks provide a snapshot of relative performance.

• Trailing returns: Helpful for understanding compounded returns between specific dates. Allows easier comparison between funds over a defined period.

• Rolling returns: Offer a daily or fixed frequency perspective providing insights into consistency and the likelihood of specific returns over various investment periods.

Wrapping up:

As you navigate the landscape of investments, remember that past performance does not guarantee future results. Utilise annual, trailing and rolling returns as important metrics in your investment plan. Considering them collectively to make more informed decisions could help you plan well with fixed income investments.

Understanding the concept of annual, trailing and rolling returns empowers investors to navigate the complex world of financial products, providing them with the insights needed to make sound investment choices aligned with their financial goals.