Rolling Returns: Why a Fund’s 5-Year Return Can Mislead

A point-to-point return measures growth between two specific dates. Move either date and the answer can change dramatically, because it depends on whether the start happened to be a peak or a trough. Rolling returns fix this by computing the same period, say five years, starting from every possible date in the fund’s history, and showing you the whole range.

If you judge a fund on the single five-year figure in its factsheet, you are partly judging the calendar.

One fund, three five-year returns

Consider an illustrative equity fund whose NAV at the end of each year looks like this. It is a constructed example, not a real fund, chosen to show the effect clearly.

Three different five-year windows are available:

Same fund, same manager, same portfolio approach. The “five-year return” is anything from under 1% to nearly 13%. The window starting at a high point, year 1, looks terrible. The window starting at a low point, year 2, looks excellent. An investor reading a factsheet in year 6 would see one number; an investor reading it a year later would see a completely different one.

What rolling returns do

A rolling return series computes the same-length return from every available starting point, usually daily or monthly rather than yearly, and then summarises the results. Instead of one figure you get a distribution:

• the average or median return over all windows;
• the minimum and maximum;
• the share of windows with a negative return, or a return below some threshold such as a fixed deposit rate.

For the example above, the five-year rolling returns range from 0.8% to 12.9% with a middle value of 8.4%. That range tells you far more about what an investor might actually have experienced than any single number.

How to use them to compare funds

Suppose two funds in the same category show similar five-year point-to-point returns. Rolling returns can separate them:

• Consistency. A fund whose five-year rolling returns range from 9% to 14% has delivered more predictable outcomes than one ranging from 2% to 20%, even if the averages match.
• Downside. The minimum rolling return, and how often returns fell below a fixed deposit, tells you how bad an unlucky entry point has been.
• Against the benchmark. The most useful version compares the fund’s rolling returns with its benchmark’s over the same windows, and shows the percentage of windows in which the fund beat it. A fund that beat its index in 85% of five-year windows has a different record from one that beat it in 50%.

Always compare funds over the same windows and the same period length. A fund launched in a strong market has no bad windows yet, not because it is better but because it has not been tested.

Choosing the window length

Match the window to how long you intend to hold. Equity funds are usually judged on five- and seven-year rolling windows, because one- and three-year windows in equities are dominated by market swings rather than fund quality. For debt funds, shorter windows are more relevant.

Longer windows narrow the range. They do not remove it. Even over long periods, the start date still influences the outcome.

Check how much history sits behind the figures too. A fund with eight years of data has only about three years’ worth of distinct starting points for a five-year window, and those windows overlap heavily. A rolling-return summary built on a short history looks precise but rests on very little independent evidence.

What rolling returns still do not tell you

• Your own return. Rolling returns describe lump sums held for the full window. If you invested through a SIP, your experience is measured by XIRR, not by the fund’s rolling CAGR.
• The future. A consistent history is evidence about process, not a promise. Managers change, fund sizes grow, and markets change character.
• Risk taken to get there. Two funds with similar rolling returns may have taken very different amounts of risk. That is what volatility and risk-adjusted measures on a factsheet are for.

Where to find them

Some fund houses and fund research websites publish rolling return charts. You can also compute them yourself from historical NAVs, which fund houses publish: put dated NAVs in a spreadsheet, and in each row divide the NAV five years later by today’s NAV, raise to the power one-fifth and subtract one. Then look at the column’s minimum, maximum and median.

Where this fits

• Your own return on the same fund: XIRR or CAGR
• Costs that reduce every window: what a 1% expense ratio costs over 20 years
• Compute returns: mutual fund returns calculator · CAGR calculator
• Active or passive: active vs index fund