While highlighting the rate of returns, which lies at the heart of the proposition of any mutual funds scheme, AMCs often highlight 1-year returns. According to the MD and CEO of Edelweiss AMC, Radhika Gupta, nothing can be more misleading than the 1-year returns, which give an inflated picture of the returns. It can easily trap investors in an unpleasant situation.
“Stop showing 1-year performance”
In a recent event, she has pleaded to “stop showing 1-year discrete performance. It is the statistic that does single most disservice to investors. People pick funds basis short term point to point returns and we all know what happens after that.” Strong words indeed.
“Average customer experince over long term”
In order to present a fair idea of a fund’s performance, Gupta has pitched for 5-year rolling returns. “My request is to show 5 year rolling returns. Min, max, average. This shows the average customer experience over a long term which is what is relevant for investors,” said the investment expert.
In response to Gupta’s note on X, a reader wrote that between 2019 and 2023, the rolling returns of Nifty 50 is 6-26% in 1 year, 11-18% in 3 years and 8-18% in 5 years. On the other hand, in July 2024, the trialing returns of the index in 1 year is 27%, in 3 years is 18% and in 5 years in 19%.
Significance of 5-year rolling returns
Rolling returns are computed for any given period of time on a continuous basis. In a sense, rolling returns provide the investor with a fairer picture of returns over a particular period.
If someone wants to find out the returns for 5 years of a find between 2019 and 2023, it will entail calculating the 5-year return on each day during this period – say from January 1 and December 31 in 2019, 2020, 2021, 2022 and 2023.
Rolling returns offers the investor a glimpse of the returns a particular scheme has delivered for the period the investor is interested in. Many experts are of the opinion that rolling returns offers the best measure of performance. It measures absolute and relative performance of a fund across time scales and is bereft of bias.
Limitations of trailing, annual returns
Trailing returns might have a recency bias and point-to-point returns are pertinent to the time period under discussion. Fund consistency and volatility are two aspects that trailing returns don’t really reflect. Annual returns may not fully indicate the effect of compounding over an extended period. It could lend an incomplete picture of overall performance.
Investor education is a subject close to Edelweiss MD Radhika Gupta’s heart. Her latest argument is related to something that concerns almost all mutual fund investors. Biz News Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
