Returns - Absolute & Annualised returns

▪ Returns is money made (or lost) on an investment over a period of time

Example – You purchased a house at ₹1 crore and sold it for ₹1.5 crores, then the returns you made
is ₹50 lakhs

Absolute Returns
• An absolute return measures an investment’s performance without regard to the amount of
time committed
50,00,000
• Considering the previous example, Absolute returns= 1,00,00,000 ×100 = 50%
 Compounded Annual Growth Rate (CAGR)

Compounded Annual Growth Rate (CAGR)

• Annualized Return (CAGR) is the amount of money the investment has earned for the
investor per annum
• Let’s you purchased the property and sold it after 2 years then the annualized returns would
be:
1
𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 𝑁
• −1
𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙
1
1,50,00,000 2
• - 1 = 22.47%
1,00,00,000

Return
Yea Beginning Returns Ending
Start Date End Date s
r Value (₹) Value
Rate
1 Jan 01, 2020 ₹1,00,00,000 Dec 31, 2020 22.47% ₹22,47,449 ₹1,22,47,000

2 Jan 01, 2021 ₹1,22,47,000 Dec 31, 2021 22.47% ₹27,52,551 ₹1,50,00,000

If the investment tenure is more than 1 year – Use CAGR

If the investment tenure is less than 1 year – Use Absolute Returns
 Trailing returns

Trailing Returns
• Trailing returns are the returns that measure the performance of a mutual fund for the past
specific periods, such as 1, 3, 5 years or inception-to-date basis.
• It calculates point to point returns and then annualize them and hence it is also known as point-
to-point returns.
• For example, let’s calculate the trailing returns of Nifty 50 for various time periods:
Nifty 50 closing price as on Aug 31, 2022, is ₹17,759, calculate 1,2,3,5 and 10 years returns

Sr No Horizon Date Price CAGR

1 1 Year 31-Aug-21 ₹ 17,132 3.7%
2 2 Year 31-Aug-20 ₹ 11,388 24.9%
3 3 Year 31-Aug-19 ₹ 11,023 17.2%
4 5 Year 31-Aug-17 ₹ 9,918 12.4%
5 10 Year 31-Aug-12 ₹ 5,259 12.9%
 Trailing returns

Evaluation
Let’s evaluate the below schemes based on their Trailing returns as on Aug 31, 2022

Scheme A Scheme B
1 Year 2% 6%
2 Year 24% 30%
3 Year 17% 18%
5 Year 12% 8%
 Trailing returns

Limitations
• Trailing return has a recency bias. It is based on a single point-to-point reading of fund
performance.
• A sharp uptick in recent performance will make returns across all trailing periods look healthy.
Similarly, a dip in recent performance will make all returns appear weak.
• Due to this, we get distorted picture of funds performance. Hence, a fund’s return profile may
appear artificially superior or inferior
 Rolling returns

Rolling Returns
• Rolling returns are returns taken over a continuous period. That is, a particular period of returns
is taken at regular intervals over a period.
• Let’s say you want to look at 5-year rolling returns for a fund daily over the years from 2019 to
2022. You will get a series of 5-years returns as on each date for the entire 3 years.
• This will be called rolling 5-years, rolled daily over 3 years.
 Rolling returns

Example
Let’s calculate the 5 years rolling returns for Scheme A (rolled daily for last 3 years) as on Aug 31,
2022
Sr No Date Date CAGR 5 Years Rolling returns
25.00
1 31-Aug-22 Aug 31, 2017, to Aug 31, 2022 12.1%
2 30-Aug-22 Aug 30, 2017, to Aug 30, 2022 13.2% 20.00

3 29-Aug-22 Aug 29, 2017, to Aug 29, 2022 12.8%

15.00
4 28-Aug-22 Aug 28, 2017, to Aug 28, 2022 13.3%
10.00

5.00

749 03-Sep-19 Sep 03, 2014, to Sep 03, 2019 12.0%

0.00
750 02-Sep-19 Sep 02, 2014, to Sep 02, 2019 12.1%

Jun-20

Jun-21

Jun-22
Aug-19

Dec-19

Aug-20

Aug-21

Aug-22
Apr-20

Apr-21

Apr-22
Oct-19

Feb-20

Oct-20
Dec-20
Feb-21

Oct-21
Dec-21
Feb-22
751 01-Sep-19 Sep 01, 2014, to Sep 01, 2019 12.3%
752 31-Aug-19 Aug 31, 2014, to Aug 31, 2019 12.6%
5 Years Rolling Returns 13.5%
 Rolling returns

Part 1
• Refers to the Duration for which the returns are being considered. Example, duration is 5 years
Part 2
• Refers to the Frequency or how often the returns are being looked at. Example, you are looking 5
years returns every Single day.
Part 3
• Refers to the Time period for which the returns are Rolled. Example, the Three parts together
mean that we are looking at 5-years returns, every single day, for 3 years.
 Rolling returns

Evaluation
Let’s evaluate the below schemes based on their Rolling returns as on Aug 31, 2022

Trailing returns Rolling returns (3 Years Average)

Scheme A Scheme B Scheme A Scheme B

1 Year 2% 6% 1 Year 19% 20%
2 Year 24% 30% 2 Year 14% 11%
3 Year 17% 18% 3 Year 12% 7%
5 Year 12% 8% 5 Year 13% 8%