Before investing in mutual funds investors generallyconsider CAGR as one of the parameters for fund selection. Compounded Annualized return or CAGR tracks the year on year growth of the investments over a specific period of time.
To have a clear picture, let’s take an example. Suppose a fund was started in January 1, 2011, with an NAV of Rs 10. By December 31, 2016, its NAV had increased to Rs 20. The CAGR return of the fund over the five-year period comes to 14.86%, which seems pretty good. The problem with this measure of return is that it doesn't tell you how the fund behaved in different market conditions.
To track the growth of the fund one may look at rolling returns over different time periods. Rolling returns/point-to-point returns are basically annualised returns or CAGR returns over different time periods i.e., every day/week/month and taken till the last day of the duration.
How to calculate rolling returns
This method calculates returns for various one-year periods rather than relying on a single date separated by one year. For example, you can calculate returns from January 1, 2015 to Jan 1, 2016, February 1, 2015 to February 1, 2016, etc., continue this for 12 months and take the average.
This will give the average return, which is not influenced by short-term events.Rolling returns measures the fund's absolute and relative performance across all timescales without bias.
If an investment states that last year it had a one-year return of 9% that usually means if you invested on January 1, and sold your investment on December 31, then you earned a 9% return.
If the investment states that it had an 8% annualized return over ten years, that means if you invested on January 1, and sold your investment on December 31 exactly ten years later, you earned the equivalent of 8% a year.
However, during those ten years, one year the investment may have gone up 20% and another year it may have gone down 10%. When you average together the ten years, you earned the “average annualized” return of 8%.
Thus, all long-term investors should view rolling returns before setting return expectations on their retirement income plans.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.