Trailing Returns

It measures the point-to-point annualised returns of an investment.

Example: if ABC mutual fund has given a 12% trailing return for 3 years till today (22 July), it means that the fund has given an average return of 12% every year till today.

This can be done for multiple time periods — 1/3/5/10-years.

However, trailing returns might not always be the best metric.

Looking at rolling returns alongside this will give a more accurate picture.

Mutual fund performance

When you see a mutual fund’s returns, you are seeing its per annum returns.

So, if a mutual fund’s 3-year returns (3Y) is 12%, it means 12% per annum for 3 years.

In case of mutual funds (especially equity mutual funds), returns can be volatile in the short term.

This is why, usually, 1-year returns change a lot more than 3-year returns (and why 3-year returns change more than 5-year returns).

So when the markets move up, the 1-year returns move up more than the 3-year returns, and so on.

The opposite happens when the markets fall.

This is why investors should focus more on the longer-term returns — not just the last 1-year and 3-year returns.

Q. “The return received in mutual fund is rightly called interest. If true, how true.”

Mutual fund returns are not called ‘interest’.

The word ‘interest’ is used only when money is being lent/borrowed.

Example: you borrow Rs 1 lakh from the bank at 10% interest, for 1 year.

So you have to pay back a sum of Rs 1 lakh + 10% interest after 1 year.

Similarly, when you invest money in an FD, you are actually giving a loan to the bank. This is why the bank pays you an interest.

In mutual funds, you are giving your money to a group of experts (fund manager + team) to invest on your behalf.

You are buying an asset, not lending your money.

Similar to buying a house—investing in it gives you returns but not interest.

Mutual fund companies

The main business model of mutual fund companies revolves around fees.

They earn money by charging a small fee from investors. This fee is called expense ratio.

Investors need not pay it separately. It is a part of every mutual fund and is automatically deducted.

The mutual fund returns you see and get is after the deduction happens.

So whatever returns you are seeing are final — you are getting the returns you are seeing.

This is how mutual fund company’s interests are aligned with investors' interests — the higher the returns the investor gets, the higher their earnings.