What are Blue Chip Funds? – Types and Advantages
When someone tells you they are planning to invest in blue chip stocks, they are talking about investing in shares of very large and well-recognised companies with a long history of sound financial performance. Equity mutual fund schemes that primarily invest a major corpus in stocks of companies with large market capitalisation are known as blue chip funds.
This blog talks about the types of blue chip funds, how they work and their benefits.
What are Blue Chip Funds?
Blue chip funds are basically large-cap equity funds that typically invest in stocks or shares of companies with large market capitalisation. These companies are generally well-established firms with sound financial performance.
As per SEBI, there’s no separate categorisation for such funds. So, you can call most large-cap funds as blue-chip funds. As per SEBI norms, large-cap funds have to invest 80% of their corpus in shares of the top 100 companies by market cap. The same rule applies for blue chip funds.
How does a Blue Chip Fund Work?
Also referred to as large cap funds, blue chip funds allocate at least 80% of the fund corpus to the top 100 stocks in India with regard to market capitalisation. This protects them from the market risks of mid and small-sized companies.
Although large-cap stocks usually generate lower returns than small-cap or mid-cap stocks, they are associated with lower financial risk.
Large-cap companies have a strong market position and a proven track record in terms of performance. They have the ability to offer steady capital appreciation and regular dividends.
Individuals seeking low-risk equity exposure can consider investing in blue chip funds.
Also Read: Small, Mid And Large Cap Funds: A Detailed Comparison Before You Invest!
Types of Blue Chip Funds
Blue chip funds invest in stocks of established companies who are renowned in their respective industry or sector. In India, there are quite a number of blue chip companies that are well-known and prestigious, and are hence referred to as “blue-chip”.
They can be categorised into two types: large cap funds and index funds.
1. Large-cap Funds
Large-cap funds generally invest in the top 100 companies listed on NSE/BSE. The stocks of large-cap companies offer steady returns to investors in the long run. Hence, if you invest in blue chip large-cap funds, the capital appreciation might not be exceptionally high, but your investment will be well-protected.
2. Index Funds
An index fund, as the name suggests, tries to replicate the performance of the underlying index. It is a passively managed fund where the fund manager follows some pre-set rules to generate similar returns as per the index.
For example, if the underlying index of an index fund is NIFTY 50, it is the fund manager’s responsibility to mimic the returns of NIFTY 50 while minimising tracking errors.
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Disclaimer: Mutual fund investments are subject to market risk, read all scheme-related documents carefully.
Benefits of Investing in Blue Chip Funds
Here are some noteworthy benefits of investing in blue chip:
1. Offers Stability
These funds invest in companies having a favourable track record from a financial standpoint. Such mutual fund schemes balance out returns and risks effectively. Even during volatility in the market, large cap funds can provide stability to the portfolio.
2. Steady Capital Appreciation
Since blue chip companies deliver stable earnings and profits, their stock price doesn’t fluctuate much. Accordingly, blue chip funds have the ability to provide capital appreciation to their investors who have a medium to long-term investment horizon.
3. High Liquidity
These funds offer high liquidity to investors. Individuals can redeem their units easily as per their convenience as there is no lock-in period. To initiate the redemption process, one simply needs to place a request with the fund house.
4. Diversification
These funds invest in large cap stocks across different sectors. This multi-sector diversification mitigates portfolio risk. Furthermore, investors do not have to invest in different sectors individually to build a diversified portfolio.
5. Expert Fund Management
Investors allocating their funds to blue chip funds get access to the expertise of the fund managers. These highly-skilled professionals take all buying-and-selling decisions after conducting thorough research and analysis. Owing to this reason, investors do not need to monitor the market regularly.
Who Should Invest in Blue Chip Funds?
The following may consider investing in blue chip funds:
- Investors looking to invest in top stocks of India with a small amount
- Investors seeking higher returns than debt instruments
- Individuals who are looking to add stability to their portfolio
- Investors who don’t have time to track the market regularly
In case you think that these funds are a suitable investment option for you, visit Navi Mutual Fund and start investing with an amount as low as Rs. 500.
Things to Consider Before Investing in Blue Chip Funds
The following parameters must be kept in mind before investing in:
1. Investment Goals
These funds are suitable for those who have a medium to long-term investment horizon. For individuals, it is essential to identify their investment objectives before allocating their savings to such schemes.
2. Expense Ratio
Just like other mutual fund schemes, blue chip funds also charge an expense to effectively manage your investment. This is known as expense ratio, which includes advertising costs, management fees, and administrative costs, distribution fees, etc. A low expense ratio can help to fetch more returns.
3. Investment Risks
These funds are risky owing to the equity exposure. That said, if you compare these schemes with mid cap or small cap mutual fund schemes, the NAV (Net Asset Value) movement is relatively small. Make sure to assess your risk profile before investing in these mutual fund schemes.
4. Direct/Regular Plan
When you directly purchase mutual fund units from a fund house, you invest via a direct plan. Contrarily, when you invest in these funds through distributors or brokers, you invest via a regular plan. Regular plans involve a commission for the intermediary, which is why they have a high expenses ratio.
5. Mode of Investment
An investor can start investing in mutual funds through SIP (Systematic Investment Plan) or lump sum mode. Under SIP, you can invest a certain amount at regular intervals (such as monthly, yearly, half-yearly or quarterly). On the other hand, lump sum mode allows you to invest in one go.
Also Read: Dividend Yield Funds: Benefits, Risks & Things To Consider Before Investing
Final Word
Blue chip funds are suitable for your long-term financial goals, such as retirement, child’s education and marriage. That said, before investing in these funds, make sure to consider your risk appetite as these schemes are associated with significant risk owing to the equity exposure.
FAQs on Blue Chip Funds
Ans: Small-cap and mid-cap stocks usually generate higher returns than blue-chip stocks. However, the underlying large-cap stocks are less risky than small-cap and mid-cap stocks. This is because most blue-chip companies have a significant market share, and they are able to deliver strong financial performance consistently.
Ans: When an investor sells the units of a blue-chip fund before 1 year from the date of purchase, short term capital gains tax at the rate of 15% is levied on the realised returns.
On the other hand, when an investor redeems his/her units after 1 year, long term capital gains tax at the rate of 10% is imposed on the profits. Note that no tax is levied on long term capital gains of up to Rs. 1 lakh.
Ans: No, blue-chip funds do not provide any tax benefits. However, ELSS funds offer a tax deduction of up to Rs. 1,50,000 per annum to its investors. Such a benefit is applicable under Section 80C of the Income Tax Act, 1961.
Ans: The investment time horizon of individuals depends upon the financial goals of investors. That said, keep in mind that one should stay invested for as long as possible to benefit from the power of compounding.
Ans: To compute the returns from blue-chip funds, you can use a mutual funds return calculator for SIP and lump sum investments. Simply enter the investment amount, expected rate of return, and the period of investment. The online tool will display the estimated returns and the total value.
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
