How to analyse mutual funds using mean returns

Rolling returns are used for computing the mean return of a mutual fund. In the factsheet of mutual funds, we normally come across trailing returns. They are also called point to point returns. These returns are computed for different time periods like: one month, three months, six months, one year etc. Trailing returns, however, suffer from end point bias and may generate inflated or deflated returns depending on the NAV as on the last day of the study period.

In order to avoid end point bias and factor the inter-temporal stochastic volatility in NAV, we use rolling returns. The computation of rolling returns involves the following steps:

• Defining the time range for which we want to compute the mean rolling return.
• Select a rolling period that is a time interval within the defined time range. The rolling period can be weekly, monthly, quarterly, etc.
• Select a rolling frequency. This is the time interval at which we wish to find the rolling period returns. Rolling frequency can be daily, weekly, fortnightly, etc.

Let us consider a case where our objective is to find out the mean rolling return of a mutual fund for the last five years. We select a rolling period of one month with a rolling frequency of 1 day. This will give the monthly return of the fund had one invested on any day in the last 5 years.

In the below example, rolling period used is monthly and the rolling frequency used is daily
Mean rolling returns (Scheme: SBI Bluechip Fund – Regular- Growth)



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