An investor considers a variety of factors before investing in any investment scheme, and one of these factors is the return on investment (ROI). Investors analyse returns on investment by categorising them into three broad types – Annualised returns, trailing returns, and rolling returns. Understanding the key differentiating factors between annualised and trailing returns can help investors analyse their returns better and help them plan any investment – stocks, gold, or long-term mutual funds.
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What are annualised returns and how are they calculated?
An efficient way for an investor to check the performance of mutual funds in India is checking their annualised returns year-on-year. The annualised returns of any investment scheme are indicative of the scheme’s performance in a calendar year. Investors can gauge the growth potential of an investment scheme by checking its annual returns for the past few years. The following formula is used to calculate annualised returns:
Annualised returns = (NAV of a mutual fund on current date – NAV of a mutual fund a year earlier) / (NAV of a mutual fund a year earlier)
The following table is representative of the calculation that is to be followed if an investor wishes to know the annualised return of a mutual fund scheme ABC in the year 2022:
| NAV on 31st December, 2021 | ₹ 76.33 |
| NAV on 31st December, 2023 | ₹ 106.83 |
| Difference in NAV | ₹ 30.5 |
| Annualised return of fund ABC | 40% (approximately) |
In the above example, the annualised rate of return was calculated to be 40% based on the formula mentioned earlier. Investors can calculate the annualised returns of an investment scheme by using the same formula.
What are trailing returns and how are they calculated?
Trailing returns help investors analyse the performance of an investment scheme for specific periods in the past (for example, three years, five years, etc., also called as “trailing periods”). They are also known as point-to-point returns since the investor can analyse these returns to know the performance of an investment scheme during a specific period in the past. Here is the formula to calculate trailing returns:
Trailing returns = [(Current NAV of mutual fund) / (Starting value of NAV of mutual fund)] ^ [1/trailing period] – 1
If today’s date is 5th January 2024 and the investor wishes to check the 3-year trailing return of mutual fund XYZ, here is how it would be calculated:
NAV of the mutual fund ABC on 5th January 2024: ₹ 54.58
NAV of the mutual fund ABC on 5th January 2019: ₹ 24.01
Absolute return: (54.58-24.01) / (24.01) = 127.01%
3-year trailing return: [(54.58/24.01) ^ (1/3)] – 1 = 31.49%
The trailing return of the mutual fund ABC is, therefore, 31.49%.
While understanding mutual fund schemes by analysing them before investing, investors should also decide on the type of returns that they wish to analyse. Annualised returns can help investors gauge market volatility, while trailing returns can help them know the compounding effect on their returns over time. Before investing in a mutual fund scheme, investors must use a mutual fund calculator to estimate their returns in advance. They must then plan for their investment by analysing more than one category of returns instead of analysing only one.
