Your Money: Know the full story behind the returns

financialexpress.com:

By Varun Fatehpuria

Investors frequently pursue only high returns, a tendency that becomes more pronounced in a bull market. While returns hold significance, they are not sacrosanct. We need to understand the period in which those returns were generated, how much risk the fund manager took when achieving those returns and what is the likelihood that the performance will sustain in the future.

Here are three essential alternative metrics to consider when evaluating funds in a more holistic manner:

Rolling returns

If you prioritise returns, rolling returns are preferable. Trailing returns, which gauge the return between two specific dates, offer an inadequate indication of a fund’s performance. There’s little assurance that you can replicate the same future return since that performance occurred during a very specific time frame. Rolling returns, however, are superior as they measure the consistency of a fund’s generated returns.

For instance, a one-year rolling return over 10 years displays the fund’s performance across multiple one-year periods within those 10 years. This approach sidesteps the bias of trailing returns and provides a more accurate assessment of the fund’s consistent performance. Consequently, it allows for a more reliable estimation of the potential return range if you invest in the fund for one year.

Downside capture ratio

The downside capture ratio serves as a strong indicator of a fund’s ability to safeguard itself in a bearish market. A ratio under 100 signifies that the fund’s losses are less severe compared to its benchmark, while a ratio above 100 suggests greater underperformance. All else being equal, this ratio is among the most crucial factors to consider when evaluating a fund. This is