Looking for mutual fund with highest returns? Radhika Gupta warns of broken metric

When looking for mutual funds with highest returns, investors often find websites that give discrete point to point returns, which Radhika Gupta of Edelweiss Mutual Fund warns is a broken metric because one good year or bad year colours the entire history.

She posted on social media, “Most websites that do mutual fund analytics focus on discrete point-to-point returns. I have said time and again, this is a broken metric because one good year or bad year colours the entire history.”

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Gupta advocates for rolling returns as they show how consistent a fund has been over time and not just at one particular point and also represent the experience a cohort of investors have had over a three or five year period.

In a move to empower investors with better decision-making tools, Edelweiss Mutual Fund has now introduced rolling return data on its fund pages. Users can view, analyze, and play with the data to better understand the long-term behavior of the funds they are considering.

Gupta expressed hope that other mutual fund platforms will also adopt rolling return displays to encourage better investment practices.

What is rolling return in mutual funds?
A rolling return is the average of a series of returns over a long period of times. It is the annualised return of any scheme taken for a specified time period.It can be rolled on a daily, monthly, or yearly frequency in the defined time-period. As compared to trailing returns, rolling returns is the best measure to analyse the performance of a fund.

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Trailing returns have a recency bias and point-to-point returns are specific to the period taken for analysis. On the other hand, rolling return measures the fund's absolute and relative performance across all time periods without any bias.

Rolling returns gives a comprehensive picture of the performance by a fund. Due to different time periods involved, the return consistency of the fund over a defined time period can be analysed efficiently as it considers both upstream and downstream in the market.