Yearly, Continuous, and Progressive Yields - Explanation, Method, and Significance
In the world of investments, understanding the performance of various products is crucial for making informed decisions. Three key metrics that help investors evaluate the returns of their investments are annual returns, trailing returns, and rolling returns.
Annual Returns
Annual returns measure the return generated by an investment over a fixed, single calendar or financial year. This shows how a fund performed during that specific year and is useful for year-on-year comparisons. However, it can be affected by volatile market events within that year.
To calculate the annual return, find the investment price (or Net Asset Value, NAV) at the end of the current calendar year and the previous calendar year. Subtract the previous year's price from the current year's price, and divide the change in price by the last year's price.
For example, the annual return for the Nippon India Small Cap Fund in 2021 is calculated as follows: Annual Return = (NAV on Dec 31, 2021 - NAV on Dec 31, 2020) / NAV on Dec 31, 2020
Trailing Returns
Trailing returns calculate the total gain or loss from a specific past date up to today over fixed intervals such as 1-year, 3-year, or 5-year periods. The start date varies depending on the look-back period, and the endpoint is always the present. Trailing returns give a snapshot of recent historical performance, but do not adjust for volatility and thus can be less precise for forecasting.
For instance, the calculation for 3-year trailing return is provided in the example using the Parag Parikh Flexi Cap Fund.
Trailing returns, however, do not show the volatility of a fund's past performance, even if two funds have similar returns.
Rolling Returns
Rolling returns assess returns over multiple overlapping periods within a fixed time span—for example, the 3-year return calculated every day for 5 years. This produces a range of returns that capture performance consistency and variability over time. Rolling returns provide a dynamic and comprehensive view of how an investment behaves across different time windows, allowing investors to gauge stability and likelihood of achieving returns.
From the rolling returns table, it is clear that investors who stayed invested for 15 years have had better chances of earning more than 12% returns than those investors who stayed invested for a short period of 1-3 years.
Comparing the Three Metrics
Comparing these year-on-year annual returns with a scheme's benchmark or its category average will give a better idea about the fund's performance. On the other hand, trailing returns provide a recent performance snapshot relevant for assessing how an investment has done over fixed recent periods. Rolling returns offer deeper insight into the stability and reliability of returns across many different time frames, highlighting variability and smoothing out anomalies from fixed start/end dates.
Together, they allow investors to compare performance, understand return consistency, and gauge risk more comprehensively, thus making better-informed choices suited to their time horizon and risk tolerance.
Performance Comparison of Three Funds
The table provides 10-year trailing returns for three funds: Aditya Birla Sun Life Tax Saving Fund, HDFC Taxsaver, and Quant ELSS Tax Saver Fund. The Quant ELSS Tax Saver Fund has given the highest return in the last 10 years, with a trailing return of 19.84%. HDFC Taxsaver has given the lowest returns, with a trailing return of 12.83%.
Understanding these metrics is essential for making informed investment decisions. Each metric offers unique insights into the performance and risk of an investment, helping investors make decisions that align with their investment goals and risk tolerance.
- In the realm of personal-finance and investing, mutual funds can be a useful tool for tax saving, as understanding their performance using metrics like annual returns, trailing returns, and rolling returns is crucial for making informed decisions about investment choices.
- When comparing different mutual funds in terms of tax savings, analyzing the 10-year trailing returns, such as those for funds like the Aditya Birla Sun Life Tax Saving Fund, HDFC Taxsaver, and Quant ELSS Tax Saver Fund, can provide valuable insights into each fund's performance and risk, aiding investors in making decisions that optimize their tax savings based on the funds' return consistency and stability.
