Fund returns are a simple concept once we refresh our basics. The idea of returns is of course simple. If something was worth Rs 1,000 one month ago and is worth Rs 1,100 today then it has returned 10 per cent over the period. This concept can be extended to any time period. The only further complexity in the calculation is that of annualised returns. We display simple returns as above only for periods up to a year.
For periods greater than a year, we display annualised returns. This means that if the investment in a fund increases by 20 per cent over two years, then we'll say that it's returns are 9.55 per cent. This means that over those two years, the money increased at a rate of 9.55 per cent per year. This makes it comparable to other published rates of return like bank deposits and also allows for easy comparison.
As for the different types of returns, in most places we publish 'trailing period returns'. This means that one year returns is for one year ending yesterday and two year returns are for two years ending yesterday and so on. This gives a view which incorporates the latest events and is thus the most useful comparison. We also publish calendar period returns which are for a specific year or a quarter. Their utility in comparing how different funds did in a historical context is important.
The most important thing is to select the right period of comparison. For equity funds, period shorter than a couple of years are of limited utility as equity volatility (instead of underlying real performance) dominates the numbers. The longer the period, the more useful the comparison will be. For debt funds, shorter periods are useful because the intended timeframe of investments will be short. If you are comparing short-term funds, where investment timeframe can be two or three months, then making the comparison can be useful.
The crucial thing is that as with everything else about mutual funds, only like funds and like periods should be compared.