Do rolling returns indicate accurate fund performance in ULIPs, know how

If your investment advisor is showing you only trailing returns, he might be hiding a few facts. Experts believe rolling returns give a more accurate picture of fund performance.

Trailing returns are point-to-point returns and show how a fund has performed over a given period. On the other hand, rolling returns help investors gauge performance across blocks of time, thereby capturing fund performance over multiple periods more accurately.

Rolling returns measure not just one block of 3 or 5 or 10-year return but consider several such blocks of 3 or 5 or 10-year periods at different intervals. Hence, the fund performance is not influenced by specific points of time.

Impact of trailing returns on investments

Looking only at trailing returns can give a distorted view to investors as the market volatility near the end of the period has an undue influence on the fund performance. Any uptick in the recent performance will make returns across all trailing periods look great. Likewise, any recent fall will portray a weak performance. This ultimately will hamper the actual performance of a fund, making it appear either too high or too low.

How to gauge actual fund performance
Rolling returns normalise market variations as average annualised returns are taken for a specified period across all timescales. These returns also known as “rolling time periods” can be evaluated on a daily/weekly/monthly frequency and till the last day of the chosen period. These are more useful for examining consistency in the performance of the funds by removing the point-to-point bias in performance.

Performance of ULIP Funds
Unit-linked Insurance Plans (ULIPs) are one of the most preferred investment avenues offering exposure to equity or debt or both along with some portion of the investment directed towards life insurance. ULIPs can be great instruments to create wealth in the long run with the right choice of funds.

ULIPs offer policyholders the flexibility of switching portfolio between debt and equity, based on risk appetite, making it crucial for you to know how the fund has performed. Over the past year, many equity ULIP funds have underperformed their benchmark index (esp. Mid-cap category where 95% of funds have underperformed the Nifty Midcap 50 index).

Over a 3-year and 5-year period too, several equity ULIP funds have underperformed their benchmark index. Similar underperformance was seen in equity MFs for 1 year, 3 year and 5 year periods. However, over the longer-term (7 years and 10 years), most equity ULIP funds have outperformed their benchmark index, as per data by Morningstar Direct.

According to data sourced by leading analysis platform – Morningstar Direct, Bajaj Allianz Life Pure Stock Fund and Equity Growth Fund II have displayed strong consistency in performance outperforming the benchmark index & peer category over the long term (5 years, 7 years and 10 years). Bajaj Allianz Accelerator Midcap fund 2 has managed to outperform benchmark index and peer Morningstar category over the long term (7 years and 10 years). Also, the key equity funds of Bajaj Allianz Life have consistently been rated as 5/4-star funds by independent fund rating agency Morningstar (see charts below), indicating that they have delivered superior risk-adjusted returns over the long term.

Rolling returns for ULIP Funds
Under the Large/Multi-cap category, Bajaj Allianz Life Pure Stock Fund and Equity Growth Fund II have displayed strong consistency in performance (rolling returns) and outperformed the index & peer category in ~100% of observations. As seen in the chart below, Bajaj Allianz Pure Stock fund has outperformed the benchmark index, and the peer Insurance Multi-Cap category in 97% & 100% rolling period observations respectively. Bajaj Allianz Equity Growth Fund II has outperformed the benchmark index, and the peer Insurance Large-Cap category, in 100% of the rolling period observations.

Under the midcap category, Bajaj Allianz Accelerator Midcap fund 2 has outperformed the benchmark index, and the peer Insurance Mid-Cap category, in 90% and 85% of the rolling period observations respectively.

Further, in terms of the average rolling returns, which is the average return of all rolling period observations for the specified tenure, Bajaj Allianz Life funds have beaten all key large/multi-cap ULIP funds as seen in the table below.

Bajaj Allianz Pure Stock fund & Bajaj Allianz Equity Growth Fund II have beaten all key peer large/multi-cap funds in both 3-year & 5-year Average rolling returns (over a 10-year period ended April 2021). They have also beaten the benchmark index peer large/multi-cap categories by a healthy margin in both 3-year & 5-year Average rolling returns.

Under the Mid-cap category, Bajaj Allianz Life Accelerator Midcap Fund 2 is third among key peer Midcap ULIP funds for both 3-year average rolling return and 5-year average rolling return. (over a 10-year period ended April 2021). It also beat the benchmark index peer ULIP mid-cap category by a healthy margin in both 3 year & 5-year Average rolling returns.

Key to success with ULIP Investment

Investing systematically in equities may help compound wealth in the long term. Keeping patience and discipline during market volatility is key to achieve desired goals with Equity Funds in ULIPs. Also, judging fund performance through rolling period returns in ULIP funds can help you select the funds better while staying invested in your life goals.