This month’s cover story tackles a question that seems almost heretical in our returns-obsessed culture: What if the best starter fund isn’t the one with the most impressive track record? What if, paradoxically, for new investors, the “optimal” choice is actually a suboptimal fund?

At first glance, the idea sounds counterintuitive. Decades of personal finance advice, marketing campaigns, and investing folklore have conditioned us to believe that the way to succeed in markets is to simply “pick the winners.” But investing—especially in the early stages—is as much a psychological journey as it is a financial one. The right starting point for a beginner often has less to do with chasing maximum returns and more to do with building confidence, resilience, and discipline.

The Illusion of Track Records

When investors first dip their toes into mutual funds or ETFs, the temptation is to go straight for the fund with the highest 3-year, 5-year, or 10-year return. After all, past performance feels like the most tangible signal of future potential. But history rarely repeats in straight lines.

For example, SPIVA India’s 2023 report showed that more than 85% of actively managed equity funds underperformed their benchmarks over a 5-year horizon. Many funds that topped charts in 2017 had dropped out of the top quartile by 2021. Chasing yesterday’s winners, therefore, often sets up investors for tomorrow’s disappointments.

Why Suboptimal May Be Optimal

For beginners, the “perfect” fund is often the one that aligns with psychology rather than spreadsheets. Here’s why:

1. Stability Over Excitement
   A fund with steady, less-volatile returns—even if not spectacular—reduces the emotional rollercoaster. A 12% annualized return with fewer shocks may feel safer than a 16% return with wild swings.

2. Simplicity Builds Confidence
   Broad-based index funds or balanced hybrid funds are easy to understand. Beginners don’t need to decode sector bets or complex strategies. Simplicity keeps them invested.

3. The Role of “Psychological Wins”
   Modest, consistent growth fosters small but meaningful wins. These reinforce the habit of staying invested, which is far more important than a one-time windfall.

4. Teaching Patience
   The journey from ₹10,000 to ₹10 lakh doesn’t happen in a year. Suboptimal funds help new investors practice patience—an underrated skill in wealth-building.

The Behavioral Finance Trap: Why We Chase Winners

Investors often make decisions not from logic but from instinct. Common behavioral biases explain why chasing winners usually backfires:

• Recency Bias – Overweighting recent performance while ignoring long-term averages.

• Loss Aversion – Selling quickly after a fall, even if the investment remains sound.

• Herd Mentality – Investing in whatever peers or social media hype up.

These psychological pitfalls explain why DALBAR research consistently finds that the average mutual fund investor earns 3–4% less annually than the funds themselves—because of poor timing, not poor choices.

A Comparative Illustration

Imagine two investors in 2015:

• Investor A chose the top-rated fund of the year. By 2020, that fund had slipped to below-average performance, leading to frustration and exit.

• Investor B picked a simple, broad-market index fund. The returns were not spectacular, but they were consistent, and Investor B stayed invested.

By 2025, Investor B likely had the better outcome—not because of a better fund, but because of better behavior.

A Beginner’s Checklist for Picking the First Fund

Instead of asking “Which fund made the most money last year?”, new investors can start with these questions:

✅ Does the fund have low volatility and broad diversification?
✅ Is the investment strategy simple and easy to understand?
✅ Can I commit to holding this fund for at least 5–10 years?
✅ Does this fund encourage me to continue my SIP, even in downturns?
✅ Will I be comfortable seeing temporary losses without panicking?

If the answer is “yes” to most, then it’s a better starter choice—whether or not it’s a chart-topper.

Investing Is a Psychological Marathon

The idea that the best starter fund might not be the best performer flips conventional wisdom on its head. But seasoned investors know the truth: returns are only half the battle. The real challenge is staying invested through the inevitable ups and downs.

For beginners, then, the “optimal” first fund is not the flashiest or most decorated one. It’s the fund that encourages discipline, teaches patience, and helps them internalize the most important investing lesson: success comes not from chasing perfection, but from compounding consistency.

✅ Key Takeaway:
For new investors, choosing a suboptimal but psychologically sustainable fund often leads to superior long-term outcomes compared to chasing top performers.