What Radhika Gupta looks for in a mutual fund scheme before investing, and how you can too

Describing how she evaluates a mutual fund before investing, Edelweiss Mutual Fund CEO wrote on X that she examines the rolling return profile, both absolute and relative to the benchmark, paying close attention to the average, minimum, and maximum returns.

She has also warned that one-year performance is a risky and unreliable indicator of future returns. For equity funds, Gupta believes that if investors must rely on a single metric, 5-year rolling returns are far more meaningful.

What are rolling returns?

Rolling returns are a way to measure an investment’s performance over many overlapping time periods, rather than just one fixed period.

Imagine a fund has been around for 10 years, from 2010 to 2020.

A 5-year return means that if you stay invested for 5 years, how much do you earn? Now, different people invest at different times. Let's try to understand this with a hypothetical example where 4 investors who each stayed invested for 5 years; the only difference is their entry timing.

• Investor A invested at the start of 2010 and stayed until 2015. Their 5-year return was 10% per year.

• Investor B invested at the start of 2011 and stayed until 2016. Their 5-year return was 7% per year.

• Investor C invested at the start of 2012 and stayed until 2017. Their 5-year return was 6% per year.

• Investor D invested at the start of 2013 and stayed until 2018. Their 5-year return was 8% per year.

Rolling 5-year returns show the return earned by investors who stayed invested for five years, calculated repeatedly for every possible starting year.

How to calculate 5-year rolling returns?

"To calculate a 5-year rolling return with daily frequency between 2000 to 2025 means that we will be calculating 5-year returns on each date, with the starting date being 1 January 2000 to 31 January 2025. And then we look at this series to understand the variation of performance of the fund," said Chintan Haria, Principal Investment Strategy, ICICI Prudential AMC.

Therefore, for any rolling returns series, Chintan Haria says that one must be clear on 3 things:

1. Time frame in which the calculation should be done. It should be a long series.

2. If the frequency should be daily, weekly, monthly yearly.

3. Rolling period - the difference between two dates at any point in the series.

How can a common investor calculate rolling returns easily?

"A common investor can calculate rolling returns easily using Excel or Google Sheets by arranging monthly/weekly/daily NAV data, choosing a period such as 3 years or 5 years or 12 months, and applying the formula (Ending NAV ÷ Starting NAV)^(1/number of years) − 1, then dragging it down row by row. This produces a series of returns from which one can see the average, best, worst, and frequency of negative outcomes," explained Haria.

In practical analysis, rolling returns provide a clearer picture than headline CAGR by limiting date bias and capturing the consistency of returns across varying investment start dates.