Trailing Returns in Mutual Funds: How to Use Them for Better Investing?

 

When investing in mutual funds, one of the key factors to consider is the fund’s performance over time. One way to measure this performance is by looking at trailing returns. Trailing returns show how well a mutual fund has performed over a specific period in the past, helping investors understand its historical returns and make informed decisions. In this blog, we’ll explain what trailing returns are and how you can use them to improve your investments.

What Are Trailing Returns?
Trailing returns are the returns a mutual fund has earned over a specific period, such as 1 year, 3 years, 5 years, or even 10 years. It’s called “trailing” because the return is based on the past performance of the fund. For example, a 1-year trailing return measures how the fund performed over the past 12 months.

These returns help you compare the performance of different funds and assess whether the fund has consistently delivered positive returns over time.

How to Interpret Trailing Returns?
Short-Term vs. Long-Term Returns:
Trailing returns can be calculated for different periods. A 1-year trailing return shows how the fund performed in the last year, while a 5-year trailing return reflects its performance over five years. It's important to look at both short-term and long-term returns to get a complete picture of how the fund is performing.

Positive or Negative Returns:
A positive trailing return means the fund has grown in value over that time period, while a negative return indicates the fund has lost value. However, don’t make decisions based solely on short-term results. Always check the long-term performance to understand the fund’s overall trend.

Consistency Matters:
A fund that has consistently performed well over 3 or 5 years is likely to be a safer bet for long-term investment, compared to one with fluctuating or inconsistent performance.

Why Are Trailing Returns Important?
Performance Comparison:
Trailing returns allow you to compare different mutual funds. If you are choosing between two funds, you can use trailing returns to see which one has consistently performed better over a certain period.

Assess Fund Management:
A good track record of trailing returns often reflects effective fund management. If a mutual fund has a long history of positive returns, it may be managed by experienced professionals who know how to handle market ups and downs.

Risk Evaluation:
Funds with consistent trailing returns can show you how well a fund has handled market volatility. If a fund has good returns even in tough market conditions, it may be a safer investment for you.

How to Use Trailing Returns for Better Investing?
Look for Long-Term Consistency:
While short-term returns are important, long-term performance is often more reliable. Look at the 3-year and 5-year trailing returns to assess how the fund has performed over time.

Set Your Investment Goals:
Match your investment goals with the trailing returns of a fund. If you're planning for long-term growth, funds with solid long-term returns (e.g., 5-year or 10-year) may be more suitable. For short-term goals, focus on 1-year trailing returns.

Consider the Market Cycle:
Trailing returns are historical data. Past performance doesn’t guarantee future results. Be sure to consider market conditions and any changes in the fund’s management before making investment decisions.

Diversify Your Portfolio:
Use trailing returns to help diversify your portfolio. Invest in a mix of funds with strong long-term returns, which can provide stability and growth over time.

Conclusion
Trailing returns are a valuable tool for assessing the performance of mutual funds. By looking at the returns over different periods, you can make more informed decisions and select funds that align with your investment goals. Remember, while trailing returns are important, they should not be the only factor in your decision-making. Always consider other factors like risk, fund management, and market conditions for better investing.