First-time investor path · Lesson 6 of 7 · 8 min
Picking your first fund: broad, boring, cheap
Your first fund should be one you can describe in one sentence and hold through a 30% fall — which usually means a broad index or large-cap fund at a low TER.
Category first, scheme second
Beginners shop for schemes; investors shop for categories. Decide the job — for a first long-term fund, broad market exposure — and the category choices collapse to index funds and large-cap funds, where fund-manager skill matters least and cost matters most. Thematic, small-cap and sector funds are later-course material, not chapter one.
Within a category, the selection criteria are few and checkable: expense ratio (Lesson 5), tracking difference for index funds, scheme age and AUM as stability proxies, and nothing else that fits on a sticky note. Everything else — star ratings, 5-year winner lists — measures the past window, not the fund you will own.
Why not chase the best recent performer? Because streaks are lumpy. The worked example shows what alternating good and bad years really compound to — the arithmetic average overstates what your money experiences.
Why the 5-year winner disappoints
Assumption: Fund A alternates +30% and −10% years; Fund B delivers a steady 12% every year. Both start at ₹100, four years.
Fund A, years 1–2
₹100 × 1.30 = ₹130 → ₹130 × 0.90 = ₹117
Fund A, years 3–4
₹117 × 1.30 = ₹152.10 → ₹152.10 × 0.90 = ₹136.89
Fund A's real CAGR
(136.89 ÷ 100)^(1/4) − 1 = 8.17% a year
Fund A's arithmetic average
(+30% − 10%) ÷ 2 = 10% a year — what the marketing shows
Fund B, steady
₹100 × 1.12⁴ = ₹157.35
Fund A averages 10% a year on paper but compounds at 8.17%; steady Fund B ends ahead (₹157 vs ₹137). A −10% year needs +11.1% to undo it — losses are asymmetric, so the average lies.
Test the streak yourself
Set the up-year and down-year of a streaking fund — compare its real CAGR and corpus against a steady 12% ride.
Volatile fund's real CAGR
8.166538263919666%
Its arithmetic average return
10%
A −10% year needs more than +10% to undo it, so lumpy streaks grow less than their average suggests. Judge funds on long-horizon CAGR, not the best recent window.
Figures are labelled assumptions for teaching, not forecasts — see the sources note at the end of this lesson.
Misconception check
Two funds in the same category: Fund X returned 22% CAGR over 5 years, Fund Y 14%. Should you buy X?
Ends in a tool
Screen categories in the Funds Hub
Filter every AMFI-registered scheme by category, TER, AUM and plan type — build the shortlist from filed data, not league tables.
Screen categories in the Funds HubWhere the numbers come from
- Assumption: alternating +30%/−10% years vs steady 12% (illustrative, no fund is this regular)
No live prices or NAVs are used anywhere in this path. Lesson 6 of 7, First-time investor path.
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