Understanding Equity Returns & setting our Expectations – ROLLING RETURNS

Stock Markets give good return in long term is what has been continuously conveyed from all directions. But how long is long term, what should be my return expectations during my investment period, what is the return I would get at the end of my investment period – the questions are many!

We shall see if we could get any answers by looking at the rolling returns of the fund rather than just the point-to-point returns as specified by the fund houses. Typically, a point-to-point return of the fund for say 3 years will be calculated by looking at the start date NAV 3 years back & the latest NAV as on today. But many a times, the returns we get as an investor may not be the same as published by the fund house as the start / exit points for us may be different for each investor.

In Rolling Returns, for example if we would like to calculate for a 3-year period – what we do is we take up all possible 3 year return of the fund over a long period of time & then take an average to see how the fund has performed over different time periods of 3 years since its inception. For example, if a fund has begun on 9th July 1998, the rolling return for a 3-year period would capture all possibilities starting from 9th July 1998 to 8th July 2001, 10th July 1998 to 9th July 2001 & so on till 14th of May 2016 till 13th of May 2019 [current date as on writing this post]. This return would show the fund’s consistency over a period of time & is much better measure than looking at just the point-to-point return.

Now let us take the example of a fund – ICICI Prudential – Large & Mid Cap fund; one of the consistent performers in its category & which has been in existence since 9th of July 1998 (for about 21 years now)!

Rolling returns of the fund over a 1-year period since inception: 


As we can see from the above figure, for a one-year period, the fund has given a maximum of 231.74% & a minimum of -52.88% even though the average one-year return across all possibilities was around 23.51%. So when you invest in this fund for just one year, we should expect as per the past performance, at least 22.73% of the times negative return; we may also end up in single digit return around 17.15% of the times & greater than 30% return around 32.31% of the times. Hence though the average return may be 23.51%, the returns were hovering between -52.88% to 231.74% and you would get that return based upon your entry & exit time.

Now the question comes – do we have to time our entry & exit? The answer is simply NO – because we really do not know when the market is up & when it is down. Instead, when we just extend the time period of our investments, we see that the probability of getting a negative return diminishes because we would have invested in both the ups & downs of the market (AND) more importantly the probability of getting a better return than any other asset classes increases.

Rolling returns of the fund over a 3-year period since inception: 


Rolling returns of the fund over a 5-year period since inception:


If you look a this 5-year period, the probability of negative return has become ZERO. Still, there is a 17.14% probability that you may end up in a single digit return & that may even 1.71% once.

Rolling returns of the fund over a 7-year period since inception:


Rolling returns of the fund over a 10-year period since inception:


For a 10-year period, we see that the minimum return the fund has delivered is around 9.23% & at the same time you may end up with this return just 2.48% the times across all 10-year investment period.

From the above data, it is clear that the longer your investment horizon the better will be risk adjusted return and the probability of loss also becomes almost ZERO.

Though, future is always unpredictable, in a growing economy like India, we can expect robust stock market growth for at least next decade or so. But we should also understand that this return is NOT going to be linear & we will have to go through a series of negative returns in between! There is no other way out…

Care has been taken to provide accurate data information. 
Still any errors may not be ruled out...
Take the article with a pinch of salt to understand the concept only!