Trailing Returns

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21 Aug, 2024

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Trailing returns refer to a tool that measures the performance of financial assets, like mutual funds, over a specific period. One can use it to compare the performance of different investments in their portfolio. The tool provides people with a comprehensive idea of an asset’s performance.

The measurement of an investment’s performance using this tool does not involve making assumptions concerning future price movements. It only depends on an investment’s past performance. This tool can help one measure the yearly returns on average between a couple of specific dates. Since it shows point-to-point returns, one may not necessarily get a view of the consistency or volatility.

What Are Trailing Returns?

The trailing returns refers to a specific type of return that measures the performance of different financial assets, including stocks, for certain periods. The purpose of calculating these returns is to easily compare various investments’ performance.
Unlike these returns, rolling returns can assist individuals in long-term portfolio analysis.
A key benefit of such a tool is that it can give investors a clear idea of the investment’s progress. Also, comparing investments using this tool is very easy.
These returns generally do not show the volatility associated with a financial asset. Also, it may not necessarily show its consistency.

Trailing Returns Explained

The trailing returns refer to the change in the value of an investment in percentage over a specific duration leading up to the present or current moment. This tool serves as an indicator of past performance. Hence, it does not consider market shifts. It is quite popular for measuring mutual funds’ performance over particular periods in the past, for example, 1 year, 3 years, or 5 years.

The tool does not give any idea of particular future results. Therefore, individuals must take into account various aspects, such as risk and fees, besides such returns when evaluating an investment’s potential.

One way of interpreting such returns involves comparing the same to the benchmark utilized in the calculation process. On an absolute basis, this tool can give an idea regarding how much an investment’s value has increased with time. These returns against the benchmark can help one determine whether the asset underperformed or outperformed the benchmark over a specific duration.

Some people have the temptation to compare these returns across various investments at multiple points in time. Typically, experts do not recommend this as certain factors, for example, the overall equity market, will skew such a comparison’s results. For instance, let us say that the equity market has been doing well, but the investment portfolio is not delivering a decent performance. In that case, the trailing returns will be comparatively lower than the amount that they would earn if they invested their funds in a different timeframe.

How To Calculate?

Individuals can compute stock or mutual fund trailing returns by using the formula below:

Trailing Returns = {(Current Price/Initial Price)^(1/t) – 1} x100

Where ‘t’ is the trailing period.

Examples

Let us look at a few trailing returns examples to understand the concept better.

Example #1

Suppose Sam is an investor who allocated funds to ABC Mutual Fund on January 21, 2023. At that time, purchased 1 unit at a net asset value (NAV) of 100. On January 21, 2025, the NAV climbed to $200. Therefore, to compute the 2-year mutual fund trailing returns, he can utilize the above formula.

Trailing Returns = {($200/$100)^(1/2) – 1} x 100, i.e., (1.414 -1) x100 or 41.4%

Example #2

According to an analysis conducted by ETMutualFunds in September 2023, all schemes in 5 equity fund categories offered over 20% returns in a duration of 3 years. The categories were large and mid-cap, contra, small, mid, and value. Among these, the small-cap category provided the highest average return in the 3-year period.

The trailing returns of the five fund categories were as follows according to the published data:

Large and mid-cap fund: 25.60%
Value fund: 27.66%
Contra fund: 29.19%
Mid-cap fund: 29.99%
Small-cap fund: 36.84%

Benefits

Let us look at the advantages of this tool.

It offers a straightforward comparison between multiple funds over a certain duration.
The tool provides investors with a comprehensive understanding of the investment progress.
Another key benefit of this tool is that it can be used to compute the returns of an extensive range of investments, such as stocks, mutual funds, bonds, and more.
It helps in getting an idea of the risk level associated with the investment.

Limitations

The drawbacks of calculating an investment’s returns in this manner are as follows:

As noted above, this tool does not necessarily show the consistency and volatility of any investment in both bad and good times.
Investors need to takeinto account additional metrics to evaluate the performance of a financial asset or portfolio.

Trailing Returns vs Rolling Returns

The concepts of trailing and rolling returns can be confusing for any people new to the investment world. One can clearly understand their meaning and avoid any kind of confusion by knowing the following key differences:

Trailing Returns	Rolling Returns
These returns refer to the returns of an investment over a trailing duration that leads up to the current moment.	Rolling returns refer to the average annualized returns generated by an investment across every holding period of a certain length.
In this case, the calculation may occur for different trailing periods, for example, 3 months, 12 months, etc.	The calculation takes place for different rolling periods, for example, 1 year, 3 years, etc.
Rolling returns help assess an investment’s performance over the short-medium term.	Rolling returns help evaluate an investment’s performance over the long term.

Frequently Asked Questions (FAQs)

1. What is the difference between trailing returns and annual returns?

The key differences between trailing returns and annual returns are as follows:

• The former is the percentage increase or decrease in the value of any investment over a certain trailing period. On the other hand, annual return denotes an investment’s performance in a single calendar year.
• Unlike, trailing returns, annual returns can help in evaluating an investment’s volatility and consistency.
• The former ensures an easier comparison than the latter.

2. Are traiing returns better than rolling returns?

Generally, experts suggest that rolling returns are better, especially if judging any investment predominantly based on past performance. This is because rolling returns do not just focus on a single point in time.

3. Is total return the same as trailing returns?

No, total and trailing returns are not the same. The former measures an investment’s lifetime performance, unlike the latter, which measures the returns over a specific period only.