What do the various types of fund returns mean?
-Tanmay Jain
The idea of returns is a simple concept. For instance, if something was worth ₹1,000 one month ago and is worth ₹1,100 today then it's returned 10 per cent over the period. This concept can be extended to any time period, which introduces the concept of annualised returns. For time periods of less than a year, simple returns are what that one needs to know.
For periods greater than a year, the annualised returns is a better measure. For instance, if an 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 annualised. This makes it easy to compare returns across different funds and even different financial instruments easy to evaluate.
There is another return that you should know of: trailing returns. This return is up to the most recent time frame. 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.
Likewise, there are returns to indicate calendar periods such as yearly or quarterly. The utility of calendar returns is to in compare how an instrument fared historically.
What you as an investor should understand 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. 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, instruments across like periods should be compared.
This article was originally published on April 18, 2014.
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
