September 25, 2022

Finance & Economy

Let's Talk About Investment

Analysing investment returns – Smart Money News

Investment performance is important. Let us understand some other forms of returns and what they mean to your investments

Illustration by Siddhant Jumde

Rolling Returns: It measures the average annualised returns over a specific period of time. It is helpful in gauging an investment’s historical performance. Rolling return data for 10 years for the S&P BSE Sensex between January 1, 2010 and January 1, 2022 would cover the time between January 1, 2010 and January 1, 2020 after which you move the data by a year between January 1, 2011 and January 1, 2021 and finally January 1, 2012 and January 1, 2022. For extremely long periods, say, the 43 years bet­ween January 1, 1980 and January 1, 2022 for the Sensex, there will be 33 different 10-year periods.

Rolling Returns: It measures the average annualised returns over a specific period of time. It is helpful in gauging an investment’s historical performance. Rolling return data for 10 years for the S&P BSE Sensex between January 1, 2010 and January 1, 2022 would cover the time between January 1, 2010 and January 1, 2020 after which you move the data by a year between January 1, 2011 and January 1, 2021 and finally January 1, 2012 and January 1, 2022. For extremely long periods, say, the 43 years bet­ween January 1, 1980 and January 1, 2022 for the Sensex, there will be 33 different 10-year periods.

Rolling returns measure the daily, weekly and monthly performance of any financial instrument, be it stocks, mutual funds or indices, from the start and end dates of a period. Rolling returns indicatee the probability of earning a certain percentage of returns. For instance, the 12 annual rolling returns between January 1, 2010 and January 1, 2022 indicates two occasions when the index made losses and posted negative returns.

Returns (% per annum), Source: BSE

IRR (Internal Rate of Return): When investing through SIPs in mutual funds, the return on investment has to factor the entire series of investments. So, if one invests through a monthly SIP of Rs 5,000 for three years; there are 36 investments in all, with the first one invested for full three years and every subsequent investment a month shorter than the earlier one (35 months for the second SIP, 34 for the third and so on).

In this period, the fund’s performance keeps changing with each month, depending on market conditions. To know how SIPs have fared from start to end date, IRR comes into play. It is the implied interest rate at which the initial investment has grown to reach the ending value from start value. To understand IRR, one must know what NPV (net present value) is, which is based on the fact that the value of cash today is more than that one will get after three years, due to inflation. You can calculate IRR using a financial calculator, a spreadsheet or use online resources.

Trailing Returns: They indicate the perfor­ mance of an instrument, and are usually used to assess the performance of mutual funds over 1­year, 3­year, 5­year, year­to­date since inception. It helps com­ pare the performance of two instruments over a similar duration. So, if the current NAVs (net asset values) of fund A and fund B are Rs 20 and Rs 18 and were Rs 15 and Rs 12 five years ago, the 5­year trail­ ing return is 33.33 per cent for fund A and 50 per cent for fund B. Trailing returns give infor­ mation beyond what a fund’s NAV indicates.

https://www.indiatoday.in/magazine/smart-money/story/20220523-analysing-investment-returns-1948650-2022-05-13