Difference Between Trailing Returns vs Rolling Returns

When assessing how an investment has performed, it may be useful to evaluate two widely used measures of performance - trailing returns and rolling returns.

Each presents the performance from a different perspective. Trailing returns reflect how an investment has performed over time (e.g., 1 year, 3 years, or 5 years) that ended on a given date. Rolling returns, on the other hand, assess the performance for overlapping periods within a determined range.

A general understanding of both measures can be important for making appropriate investment decisions and comparing mutual funds or other financial products. Keep reading to learn how the two measures differ.

Trailing returns are a standard method of determining an asset’s historical performance, whether that asset is a mutual fund or stock, over a period. An asset’s trailing return is a convenient way to see the performance of an investment over the period that you have selected. It helps you establish a record of an asset’s return.

Additionally, referred to as point-to-point returns, trailing returns are simple and only tell you what has occurred in the past. They do not indicate how an investment might perform going forward. However, they can be helpful for analysing, comparing, and differentiating investments over the same period to indicate which investment did better.

Rolling returns assess an investment's performance over multiple overlapping periods. For example, while trailing returns assess performance between a defined start and end term, rolling returns give a more comprehensive sense of what an investment has produced through multiple market cycles.

Rolling returns are especially valuable for assessing long-term trends since they quickly smooth out the influence of significant market moves, which can introduce bias. This creates a more reliable method of gauging future performance by giving the investor an idea of an asset's variability in market conditions.

An Example of Calculating Trailing Returns

Trailing returns can be defined as an indicator of an investment's point-to-point performance during a particular time period.

Trailing Return = Ending Value - Beginning Value/Beginning Value * 100

Where:

• Ending Value =  Value of the investment at the end of the period.
• Beginning Value =  Value of the investment at the beginning of the period.

To make trailing returns even clearer, here is an example:

Let’s say an investor purchased a mutual fund unit for ₹90 on April 8, 2022, and the position increased from ₹90 to ₹115 on April 8, 2025. To calculate the trailing three-year return:

Trailing Return = 115 - 90/90 * 100

                          = 28/90 * 100

Trailing Return = 27.78%

The example above shows that the mutual fund has delivered a trailing return of 27.78% over 3 years.

An Example of Calculating Rolling Returns

Rolling returns assess average annualised returns across overlapping periods over a designated time. This is done in three steps:

• Step 1: Determine Returns for Each Period. For each interval, use the given formula:

Return = Ending Value - Starting Value/Starting Value

• Step 2: Calculate the Average Return: Add all the determined returns and divide the total by the number of intervals.

Average Rolling Return = Sum of Returns/Number of Periods

Here’s an example to understand it better:

Consider a mutual fund with annual NAV values as follows:

• Year 1: ₹100
• Year 2: ₹110
• Year 3: ₹120

To calculate rolling returns for overlapping two-year intervals:

Interval 1 (Year 1 - Year 2):

Return = 110 - 100/100   = 10%

Interval 2 (Year 2 - Year 3):

Return = 120 - 110/110   = 9.09%

The rolling return across these intervals is:

Average Rolling Return = 10 + 0.09/2

Average Rolling Return = 9.54%

When are Trailing Returns Better?

• Trailing returns help investors see recent performance quickly.
• Trailing returns can be used to compare mutual funds over certain fixed periods, say 1 year or 5 years of returns.
• Trailing returns are better for short-term decisions, especially when recent market performance matters.

When are Rolling Returns Better?

• Rolling returns are preferred for long-term investments. They show how stable and strong an investment can be over time.
• Rolling returns help reduce bias by averaging returns across overlapping periods. This method is better than using point-to-point returns, which can be affected by specific start and end dates.
• Rolling returns show investors how their investments could perform over time by looking at past results.

Thus, both are effective to the extent of the investor's goals.

• Use trailing returns to analyse more fixed-point performance within individual blocks of time.
• Use rolling returns when looking at long-term consistency in volatile markets. This helps investors see how well their investments hold up over time.
• Combining both may give a clearer view of past performance. This can also help predict future results using historical returns.

In conclusion, the choice to employ trailing or rolling returns hinges on the goals and objectives of the investor. Trailing returns show short-term performance, while rolling returns emphasise long-term stability. Investors who understand the pros and cons of both indicators can better shape their investment strategy.

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