How should you look at fund returns?
You can look at the returns of your mutual funds in many ways: Trailing returns, calendar year-wise returns and risk-adjusted returns.
Which of these measures is better?
Each of these measures has its own pros and cons. Trailing returns (one-year, three-year returns), the most widely available measure, suffers from the weakness that if returns in the near past have been good, the longer-term returns will also look good. So, if the markets experienced a bull run over the past one year, the three- and five-year returns will also improve, and vice versa. To get a more complete picture, investors also look at calendar year-wise return. This is a good measure of a fund's consistency. Measures of risk-adjusted returns tell you how much return the fund generated for each unit of risk taken. Thus, they give a composite picture of a fund's returns and risk.