Arriving at a stage where we're poised to dive into mutual fund investments raises a critical question: "How do we identify the best mutual fund for our needs?"

The answer is nuanced, as the concept of the "best" mutual fund is ever-evolving, contingent upon how one assesses historical returns. Essentially, there are three primary methods to calculate mutual fund returns: point returns, annual returns, and rolling returns. Each method offers a distinct perspective on the fund's performance over time, contributing to a more comprehensive understanding of its potential.

Point returns:

• Examining a fund's 1-year, 3-year, or 5-year returns presents what's known as point returns. These figures offer a concise overview of the fund's performance during those respective periods, condensing its overall performance into a single value.
• However, relying solely on these point return metrics might not provide the most accurate depiction of a fund's performance. For instance, a fund might exhibit outstanding performance in a specific six-month period, significantly influencing the overall exceptional returns. Yet, outside of this period, the fund's performance might be lackluster.
• Regrettably, many of us tend to base our fund selections on these easily accessible metrics, assuming they depict the "best performing mutual funds" at present. This oversimplification overlooks the nuances and fluctuations within a fund's performance, potentially leading to an incomplete assessment of its overall suitability for our investment goals.

Annual returns:

• Annual returns involve scrutinizing a fund's performance on a yearly basis, assessing returns for each individual year, such as 2021, 2022, and 2023. While this metric serves to gauge the fund's consistency over time, it too has its limitations.
• Using annual returns to evaluate a fund's performance over the past five years, for instance, may lead to an incomplete assessment. It's possible that a fund excels in four out of those five years, which might seem impressive. However, if a single year's underperformance significantly impacts the overall five-year performance, it could distort the fund's true standing.
• In essence, this metric is valuable for assessing the fund's consistency but may not provide a precise and holistic picture of its performance. It's crucial to recognize that this measure, on its own, may not capture the nuances and variations within a fund's historical returns accurately.

Rolling returns:

• Rolling returns present an advantageous blend, offering a dual perspective by examining both consistency and cumulative performance.
• This method involves computing point returns at various intervals throughout a fund's trajectory. Let's clarify this with an illustration: Consider a fund launched in January 2010, and we aim to evaluate its 5-year rolling returns every month. This involves calculating the 5-year returns from January 2010 to January 2015, February 2010 to February 2015, and so forth.
• This meticulous approach aids in comprehending a fund's 5-year returns at multiple junctures, allowing for an assessment of its consistency against benchmarks and peers. By delving into rolling returns, we can sift out funds that have solely excelled during isolated periods, unveiling those that have consistently performed well across diverse time frames.
• In essence, the beauty of rolling returns lies in its ability to reveal a fund's performance from various standpoints, offering a more comprehensive view that extends beyond a single time frame. It assists in identifying funds that have exhibited sustained excellence across different periods, making it a valuable tool for investors seeking consistency and enduring performance.

The next time you're selecting the 'best mutual fund,' prioritize consistency over mere current chart-topping returns. Opting for a fund that exhibits stability and reliability across time frames is key, rather than being swayed by a fund that appears excellent solely based on today's return charts.

DISCLAIMER: This blog is solely for educational purposes and not to offer any investment advice. Please do your own research or consult a financial advisor before making any investment decisions.