Funds performance is basically one of the criteria of why an investor would pick that particular fund and usually this performance is compared with an index or a basket of indices. However, not all funds would outperform the index as not even the legendary Warren Buffet could beat the index everytime even though he did manage to do that for the longest time possible.
Normally, a long term investor would look at the fund performance measured over a longer time period like 3-5 years. Over this period of time, there might be recession or a boom period but the funds would show you returns during that period without consideration of any variables. However, this is a good indicator for long term investor as all returns are averaged out among the downs and ups of the market cycle.
For short term investors, this indicator of looking at funds over a period of time might not be that great unless you consider the macro environmental conditions. Not all funds perform great in periods of boom and recession equally, some funds generally grow more than their yardstick index during a period of growth but decline more compared to the index during a correction or period of recession. However, other funds might not grow as much during a period of growth but they are resilient in the face of a correction or recession. Thus, as a aggressive investor, it would be preferable to put your funds in those that can grow more in periods of growth and switch out to a high resilience fund once a correction sets in.
However, some might question why not sell the fund rather than putting in a high resilence fund during a period of correction? This is because no one can accurately predict the time of a correction and if economic indicators show that a correction is coming, you basically switch out to hedge against it, and if you predict incorrectly, you basically still earn some returns compared to selling and you would not have to incur the high sales charge as compared to the switching fee.
For conservative investors that mostly deal with bond funds or conservative portfolio funds, do note that the returns usually show bid-to-bid returns (And this is always the indicator highlighted to you by bankers and insurance agents), thus, you would really need to check the sales charge of the fund you are buying. That is because if you are shown a fund that's providing a return of 4.5% annually which you might think it's better than your fixed deposit interest rate but when you factor in the sales charge of 5%, you are really making a loss of 0.5% annually (And you can probably dismiss that banker from your sight forever!).
Note that fund performance is not the only indicator on whether a fund is great but it is an important indicator nevertheless.
