How to Predict Mutual Fund Returns on a Monthly and Yearly Basis
Introduction
When it comes to investing in mutual funds, predicting future performance with 100% accuracy is nearly impossible. However, there are certain methodologies that can help you make informed decisions based on past performance and consistency. One such methodology is the concept of Rolling Returns. In this article, we will explore what Rolling Returns are and how they can help you in predicting mutual fund returns on both monthly and yearly bases.
Understanding Rolling Returns
Rolling Returns involve looking at the performance of a mutual fund over a specific period, but instead of checking a fixed window, you calculate returns for every single day within that period. This method provides a more comprehensive view of the fund's behavior and helps in assessing its consistency over time.
Why Rolling Returns are Important
When investing, especially in equity funds, it's crucial to understand not just the average returns but also the consistency of those returns. Just because a fund provided an average of 14.9% annual returns over the past 10 years, it doesn't necessarily mean it will provide the same level of returns in the future. This is where Rolling Returns come into play.
Example with Nippon India Large Cap Fund and Aditya Birla Sun Life Frontline Equity Fund
Let's take a closer look at how Rolling Returns can help in making better investment decisions. Consider two similar equity funds, Nippon India Large Cap Fund and Aditya Birla Sun Life Frontline Equity Fund. Both of these funds have delivered an average annual return of 14.9% over the last 10 years. But are they equally good? Let's find out.
Step 1: Calculate Returns for Different Time Periods
To assess the performance, we need to calculate the returns for every single day within a 5-year period. For instance, if you want to invest in one of these funds for 5 years, you would look at the return on investment if you had invested on the 4th of May 2012, and then calculate the return as of 5th May 2012, and so on, up until 4th May 2017.
Step 2: Analyze the Data
Once you have calculated the returns for various days, you can compile this data to compare the performance of the two funds. This approach will allow you to see not just the average returns but also the consistency of returns over the years.
Example Analysis
If you compare the 5-year returns ending on different dates, you might find that ABSL Frontline Equity Fund delivered over 12% returns 63 times, while Nippon India Large Cap Fund did so 69 times. This suggests that Nippon India Large Cap Fund has been slightly more consistent in delivering high returns over the years.
Benefits of Using Rolling Returns
Rolling Returns provide several benefits to investors:
Better Performance Analysis: It helps in understanding the consistency of fund returns over time, rather than just the average performance. Comparison with Peers: You can compare the performance of a fund with its peers more effectively using Rolling Returns. Predicting Future Performance: Although past performance doesn't guarantee future results, Rolling Returns offer a more holistic view that can help in predicting future performance.Where to Find Rolling Returns Data
While many commercial subscription services provide Rolling Returns data, there are also some free resources available. You can check the Rolling Returns of Indian mutual funds on websites like ET Money, Primeinvestor, and Advisorkhoj.
Conclusion
Investing in mutual funds involves making informed decisions, and understanding concepts like Rolling Returns can significantly enhance your investment strategy. By using Rolling Returns, you can gain a better perspective on the consistency and performance of mutual funds, leading to more reliable investment choices.
Additional Resources and Follow-Ups
If you found this article helpful, please UPVOTE and SHARE it to help us reach more readers. To learn more about personal finance, feel free to follow us on ET Money.