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Trailing returns are a widely used metric in the world of mutual funds, ETFs, and other investments. They help investors evaluate how a particular asset has performed historically over a specific period, ending on the most recent date. Instead of looking at calendar year returns, trailing returns show rolling performance — such as 1-year, 3-year, or 5-year returns — up to the present. This allows investors to compare funds or assets on a like-for-like basis and assess consistency in performance over time.
Trailing returns represent the performance of an investment over a past time period that ends on the most recent date. For instance, if a mutual fund shows a 1-year trailing return of 12% as of today, it means the fund grew 12% over the past year from this exact date last year.
This metric smoothens out short-term volatility and helps in making informed comparisons among funds that may not have the same inception dates or calendar-year reporting.
Trailing returns serve as a practical performance measure for both retail and professional investors. They provide insights into:
Historical consistency: Whether the investment has performed reliably over different periods
Comparative performance: How a fund stacks up against peers or benchmarks
Use in analysis: Indicates historical performance over set horizons
They are particularly useful when assessing equity mutual funds, hybrid funds, or ETFs, where short-term performance may not paint the full picture.
The calculation of trailing returns uses the compound annual growth rate (CAGR) formula, which reflects the average annual return over the investment period while accounting for compounding.
CAGR Formula:
CAGR = {(Ending Value / Beginning Value) ^ (1 / n)} – 1
Where:
Ending Value = NAV (Net Asset Value) on the most recent date
Beginning Value = NAV exactly ‘n’ years ago
n = number of years in the period (1, 3, 5, etc.)
Suppose a mutual fund’s NAV was ₹100 three years ago and is ₹140 today.
CAGR = {(140 / 100) ^ (1/3)} – 1 = 11.87%
So, the 3-year trailing return is approximately 11.87% compounded annually.
Investors commonly analyse the following trailing return periods:
1-Year Trailing Return: Reflects short-term performance and is more influenced by recent volatility.
3-Year Trailing Return: Offers a medium-term view and accounts for market cycles.
5-Year Trailing Return: Suitable for long-term investors assessing consistent growth.
Since Inception: Measures performance from the launch of the fund to the current date.
Some platforms also display year-to-date (YTD) or month-to-date (MTD) trailing returns for even shorter-term tracking.
Although both metrics offer performance insights, they are not the same.
| Aspect | Trailing Returns | Rolling Returns |
|---|---|---|
Definition |
Measures past return from a fixed point |
Averages returns across overlapping periods |
Time Sensitivity |
Fixed end date |
Multiple overlapping periods |
Example |
Return from 1 Jan 2022 to 1 Jan 2023 |
Average return of all 1-year periods in past 5 years |
Volatility Measure |
Less smooth |
Smoothens volatility effectively |
Rolling returns provide a broader view of consistency, while trailing returns reflect performance from a specific past point to today.
Despite their usefulness, trailing returns have limitations:
Market timing bias: They can appear overly optimistic or pessimistic depending on the recent market cycle.
No guarantee of future returns: Past performance is not indicative of future results.
Does not show volatility: A fund with high return may also carry high risk, which is not captured by this metric alone.
May not reflect SIP performance: If you invest via SIPs, point-to-point returns may not represent your personal returns.
It is common to complement trailing returns with other metrics such as standard deviation, Sharpe ratio, and rolling returns for holistic analysis.
Investors can use trailing returns to:
Compare funds of similar categories (like large-cap equity funds)
Track fund consistency over different time horizons
Identify funds that outperform benchmarks over 3-year or 5-year periods
Many analyses consider multi-year horizons (e.g., 3- and 5-year)
Trailing returns are a commonly used tool for gauging the past performance of mutual funds and ETFs across different time periods. They can offer insights into an investment’s consistency and historical trajectory. However, they are typically considered more meaningful when viewed alongside other performance metrics and aligned with the investor’s specific objectives. In practice, many investors use them as one of several inputs in a broader evaluation process.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
A 5-year trailing return represents the compound annual growth rate (CAGR) of an investment measured over the past five years, ending on the most recent date.
Trailing returns are calculated using the CAGR formula, but they specifically measure an investment’s performance over a fixed past period ending on the current date.
Looking at 3-year and 5-year returns helps investors assess a fund’s consistency and stability across different market cycles, unlike short-term 1-year returns that may reflect only temporary performance.
SIP returns cannot be measured accurately using trailing returns, and instead are better evaluated using the XIRR method, which considers the impact of periodic investments.
Trailing returns help in fund comparison by showing how different investments have performed historically over the same time period, making it easier to evaluate relative performance.
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