InvestorQ : I keep hearing about trailing returns on television and on newspaper columns. Does it pertain to stocks and what to make out of it?
Dia Deshpande made post

I keep hearing about trailing returns on television and on newspaper columns. Does it pertain to stocks and what to make out of it?

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Ria Jain answered.
2 years ago
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Trailing returns are about knowing historic returns of a stock or a fund. In trailing returns you just calculate point-to-point returns and then annualize it. It broadly gives you an idea about whether the fund or the stock has created wealth or depleted wealth over a period of say 3 years. Let us look at 4 such funds and evaluate the trailing returns.

Particulars

Fund A

Fund B

Fund C

Fund D

Investment Date

02nd Jul 2015

02nd Jul 2015

02nd Jul 2015

02nd Jul 2015

NAV

Rs.100

Rs.100

Rs.100

Rs.100

Redeemed on

02nd Jul 2018

02nd Jul 2018

02nd Jul 2018

02nd Jul 2018

NAV

Rs.165

Rs.148

Rs.139

Rs.121

3-year Returns

65%

48%

39%

21%

CAGR Returns

18.17%

13.97%

11.61%

6.57%

If you were to look at the above table, your immediate conclusion will be that Fund A is an outperformer and Fund D is a rank underperformer based on annualized returns. But there is a small problem with this calculation. This is a point to point return. That means; Fund A may have purely benefited from the timing of the purchase and sale. Probably, if you had bought the fund on 02nd August 2015 and sold the fund on 02nd July 2018, then Fund A may not have been the best performer. The moral of the story is that the trailing returns are just too dependent on the date of entry and exit. If you purchase a fund based on trailing returns, you may end up with a fund that may have done well on a point-to-point basis but may not be too consistent. That is where rolling returns have an advantage over trailing returns. Rolling returns give a much better picture of the consistency of the fund as compared to the trailing returns.

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