A blue-chip fund is a mutual fund that invests in renowned, financially stable, and consistently high-performing companies. These funds provide you with the opportunity to invest in well-established industry leaders and aim for steady growth and reduced market volatility.
If you are a conservative investor and want long-term growth and sustainability for your investment, blue chip funds are suitable due to their lower risk. Sounds great, right? There are just several things you need to be aware of before investing.
In this blog, you will learn what a blue chip fund is, how it works, its advantages, risks and challenges, how to invest, its tax implications, and much more.
What are Blue Chip Mutual Funds?
Blue-chip funds are equity mutual funds which primarily invest in the stocks of large, well-established, and financially strong large-cap companies. These companies are industry leaders with a track record of consistent performance.
The goal of blue-chip funds is to achieve long-term capital growth by capitalising on the stability and resilience of these companies. They offer relatively steady and consistent returns for long-term wealth creation with lower risk than smaller companies.
These funds maintain a diversified portfolio across sectors such as IT, healthcare, and finance and are managed by experienced professionals to optimise returns.
Though SEBI does not officially consider a blue chip fund category, the blue chip fund meaning is commonly used interchangeably with large-cap funds.
How do Blue Chip Funds Work?
Blue chip funds allow investors to participate in the financial growth of top-tier companies. These funds primarily invest in stocks of the 100 largest companies by market capitalisation and may also allocate a small portion of their portfolio to bonds and cash equivalents for diversification.
If you are a younger investor with a longer investment horizon, you can tolerate the higher risks of equity investments. As a result, you may allocate a larger share of your portfolio to equities.
By incorporating blue chip funds into your portfolio, you can achieve stability in your overall investment strategy. Generally, these funds should make up around 60% to 70% of an average investor’s portfolio. This can vary based on the different investment objectives and risk tolerance of investors.
Types of Blue Chip Funds
Blue chip funds primarily fall into two categories:
Large Cap Mutual Funds
These funds invest in large companies in the stock market, generally the top 100 by market capitalisation, such as Reliance Industries [NSE: RELIANCE], Tata Consultancy Services [NSE: TCS], Hindustan Unilever [NSE: HINDUNILVR], Infosys [NSE: INFY], HDFC Bank[NSE: HDFCBANK] and SBI[NSE: SBIN].
These well-established companies provide stability due to their strong financials, proven track records, and widespread brand recognition. Large-cap funds are generally less volatile than smaller companies, which makes them appealing to investors seeking steady, long-term growth.
Index Funds Focused on Large-Cap Stocks
These funds passively track a specific large-cap index, such as the Nifty 50 or BSE Sensex. By mirroring the composition and weightage of the chosen index, they aim to deliver returns that closely match the benchmark.
Investing in these funds is like owning a small portion of the entire index. With lower fees and high diversification, they provide a cost-effective way to gain broad market exposure. However, since their performance is directly tied to the index, they lack the potential for higher returns that actively managed funds might achieve.
Please remember that not all index funds are blue-chip funds. Some index funds invest in mid-cap, small-cap, or sectoral indices that do not primarily focus on blue-chip companies.
Advantages of Investing in Blue Chip Funds
These are some of the advantages of considering blue-chip funds for your investment portfolio:
- Ideal For New Investors: For beginners, blue-chip mutual funds can be an ideal option due to their lower volatility and moderately high risk.
- Lower Risk: These funds only invest in well-known and established companies with strong financials, which lowers the overall investment risk.
- Reliable and Stable Investment Option: These funds generally deliver stability even if the overall market is volatile.
- Liquidity: Whenever required, you can easily buy and sell units of these funds as the underlying shares have high demand and trading volumes.
- Regular Dividend: Many blue-chip companies consistently pay dividends. Investing in blue chip funds can thus offer regular earnings.
- Diversification: These funds diversify investments across multiple sectors and industries by investing in diverse companies.
- Long-Term Growth: These funds are ideal for long-term wealth building, as they provide exposure to the sustained growth of blue-chip companies.
Challenges and Risks Involved in Blue Chip Mutual Funds
Though blue-chip funds have lower risk, there are still some risks and challenges for the investors as they are equity-linked investments:
- Risk of Market Volatility: Like all mutual fund schemes, blue chip funds are also subject to market risk. During a bearish phase in the overall market, blue chip stocks may experience an impact from market downturns despite their stability and investment in large companies.
- Returns During Economic Downturns: Blue chip funds are generally resilient during economic downturns, but their performance may still be affected. It is important to check their historical performance in challenging conditions and ensure they align with your risk tolerance.
Who is the Ideal Candidate for Investing in Blue-Chip Mutual Funds?
Let us understand who should invest in blue chip funds:
- Beginner Investors: If you are new to investing, these funds can offer a steady and simple way to start your journey. Their low volatility and steady returns are perfect for beginners who are not used to bearing substantial short-term losses.
- Conservative Investors: If you prefer a low-risk approach to managing your money, these funds may align well with your financial strategy.
- Income-Seeking Investors: If your goal is to generate regular income, many blue-chip funds provide consistent dividend payouts.
- Long-Term Investors: If you are planning for future financial goals, such as retirement, these funds can serve as a solid long-term investment option.
How to Start Your Investment in a Blue Chip Mutual Fund?
To invest in any type of mutual fund, you should choose direct mutual funds, which generally have a lower expense ratio than regular mutual funds. At Torus Digital, we offer direct mutual funds across a range of categories for you to choose from.
To start, first, open a demat account with us and then choose your preferred blue chip mutual fund according to your preferences and research. The best part is that you do not need to pay any annual maintenance fees for the account.
Taxes Applicable on Your Blue Chip Fund Investment
As the major portion of your investment goes to equity, the blue-chip funds are considered equity mutual funds. These are the tax implications of blue-chip funds:
- Taxes on Dividends: The dividend you receive in your account will be taxed as per your income tax slab.
- Short-Term Capital Gains Tax (STCG): You have to pay 20% STCG for the gains you get from the units you hold for less than 1 year.
- Long-Term Capital Gains Tax (LTCG): A 12.5% LTCG is applicable on the profits you get from the units you have for more than 1 year on gains above ₹1.25 lakh.
Important Tips to Choose the Right Blue Chip Fund
Here are some important tips for you to know if you want to learn how to choose the correct blue chip fund:
- Before investing in a blue-chip mutual fund, it is important to evaluate the track record of the Asset Management Company (AMC) managing the fund. A reputed AMC can effectively navigate different market cycles and handle large investor withdrawals without major disruptions.
- It is also important to assess the fund manager’s investment style and ensure it aligns with your risk tolerance. Whether the fund focuses on growth, value, or a mix of both, the approach should add meaningful value to your portfolio.
- Another key factor is the expense ratio, which represents the cost of managing the fund. Lower expense ratios can lead to better long-term returns, so it is wise to compare the costs of different funds before starting your investment.
- Take a close look at the fund’s portfolio composition to understand where your money is being invested. Bluechip funds should stay to their investment objectives and maintain a balance in growth and value stocks as per their stated strategy.
- Finally, you can look for outperforming and top-ranking funds that have beaten their benchmark and competitors over the past three to five years. A strong track record can indicate reliability and a good fit for your investment portfolio.
Final Thoughts
Blue chip funds offer a reliable investment option for investors who want stability, long-term growth, and potential dividend income. With a focus on well-established, financially strong companies, these funds are generally more resilient during market fluctuations.
Though they are not entirely risk-free, their ability to weather economic downturns makes them a preferred choice for both new and experienced investors. Before investing, it is important to assess factors like the fund’s historical performance, expense ratio, fund manager’s experience, and alignment with your financial goals.
Start your mutual fund investment journey with Torus Digital and invest in direct bluechip mutual funds from our platform.
