What Are Blue Chip Funds? Meaning, Advantages & Features

What Is a Blue Chip Fund?

A blue chip fund is a commonly used term for a mutual fund that mainly invests in established companies with large market capitalisation, a long operating history, and a significant market presence.

The term “blue chip” originates from poker, where blue-coloured chips traditionally carry a higher value. In financial markets, the term is used to describe established companies with a recognised business presence.

Blue chip funds are generally associated with large-cap mutual funds. Under the Securities and Exchange Board of India (SEBI) categorisation framework, large-cap companies are ranked from first to 100th based on full market capitalisation. Large-cap mutual funds are required to invest at least 80% of their total assets in large-cap equity shares.

The following points summarise blue chip funds:

• Blue chip fund is a commonly used market term and not an official SEBI category.
• These funds generally invest mainly in large-cap companies.
• Their portfolio value changes according to market movements.
• The blue chip fund returns are market-linked and are not fixed.
   

How Blue Chip Funds Work

The following steps explain the general working of a blue chip fund:

1. Funds are Pooled: Fund is collected from multiple investors through the mutual fund scheme.

2. Portfolio Is Created: The fund manager invests the collected amount according to the scheme objective. A large part of the portfolio may be invested in SEBI-classified large-cap companies.

3. Portfolio Value Changes: The value of the portfolio may change due to movements in share prices, dividends, market conditions, and other factors.

4. Units Are Redeemed: Investors may redeem their mutual fund units at the applicable Net Asset Value (NAV), subject to the scheme terms.

The NAV may rise or fall based on changes in the value of the underlying securities.
 

Blue Chip Fund vs Large-Cap Fund

The following table explains the difference between the commonly used term “blue chip fund” and the official large-cap mutual fund category:

Although the terms are often used together, their meaning may differ depending on the scheme and its portfolio.

Features of Blue Chip Funds

The following are some common features associated with blue chip funds:

Dividend Income

Companies included in the portfolio may distribute dividends. However, dividend payments depend on the financial position and decisions of the respective company. Mutual fund returns do not depend only on dividends.

Investment in Large-Cap Companies

Blue chip funds generally invest in established companies that fall within the large-cap segment. The portfolio composition may vary across schemes.

High Creditworthiness

Established companies may have a longer operating history and access to financial resources. However, their financial position may change over time.

Lower Volatility Compared with Some Equity Categories

Large-cap portfolios may experience lower price fluctuations than some mid-cap or small-cap portfolios. However, they remain subject to equity market risk.

Liquidity

Units of open-ended blue chip mutual funds may generally be purchased or redeemed on business days. Exit loads and other scheme conditions may apply.

Long-term Market Participation

These funds provide exposure to large-cap equity markets over longer investment periods. Their performance depends on market conditions and portfolio composition.
 

Advantages of Blue Chip Funds

The following are some features that investors may consider while evaluating blue chip funds:

• Portfolio Diversification: A fund may invest across multiple large-cap companies and sectors.
• Professional Management: The portfolio is managed by a professional fund manager according to the scheme objective.
• Market Exposure: Investors receive exposure to established companies through a mutual fund structure.
• Liquidity: Open-ended schemes generally allow redemptions based on applicable terms.
• Financial Goal Planning: Investments may be linked with financial goals after considering the investment period and risk factors.
• Long-Term Growth Potential: Equity investments may provide growth opportunities over longer periods, although market performance may vary.
• Inflation Considerations: Equity investments have historically generated returns that may exceed inflation over certain long investment periods. However, historical returns differ across market periods and do not indicate future performance.

Blue chip funds remain subject to market movements. Inflation-adjusted returns may also depend on the investment period, fund expenses, and portfolio performance.
 

Taxation of Blue Chip Funds in India

Blue chip funds generally follow the tax treatment applicable to equity-oriented mutual funds when they meet the relevant conditions under tax laws.

The following table provides a general tax summary:

The applicable tax treatment may depend on the fund structure and prevailing tax provisions. Tax rules may change over time.

STCG on Blue Chip Funds

When equity-oriented mutual fund units are redeemed within 12 months, the resulting gains are generally treated as Short-Term Capital Gains (STCG). The applicable tax rate is currently 20%, subject to relevant provisions.

LTCG on Blue Chip Funds

Gains from equity-oriented mutual fund units held for more than 12 months are generally treated as Long-Term Capital Gains (LTCG). Gains above the applicable annual exemption limit may be taxed at 12.5%.

Dividends received from mutual funds are generally taxable according to the applicable income tax provisions. Investors may review current tax rules or consult a tax adviser.
 

Who Should Invest in Blue Chip Funds?

The following investor profiles may evaluate blue chip funds based on their financial circumstances:

• New Equity Investors: They may review large-cap funds while understanding equity-related market risk.
• Investors Considering Established Companies: These funds provide exposure to companies with large market capitalisation.
• Long-Term Financial Goal Planners: The investment period may be reviewed along with the financial goal and risk factors.
• Retirement Goal Planners: Equity exposure may be evaluated as part of a broader portfolio based on the investment period.
• Investors Comparing Equity Categories: Large-cap, mid-cap, and small-cap funds have different portfolio structures and market risks.
   

How to Invest in Blue Chip Funds via 5paisa

The following steps explain the general process for investing through 5paisa:

1. Open an Account: Complete the account registration process using the required details.

2. Complete Know Your Customer (KYC): Submit the required documents and complete the applicable verification process.

3. Search for a Fund: Review large-cap mutual fund schemes and their available information.

4. Select the Investment Method: Choose a Systematic Investment Plan (SIP) or a lump sum investment based on the selected scheme.

5. Review and Invest: Check the scheme information, applicable terms, and investment details before completing the transaction.

6. Track the Investment: Review the portfolio, fund disclosures, and investment progress at regular intervals.

Mutual fund investments are subject to market risks. Investors may read the Scheme Information Document and other scheme-related documents before investing.
 

Conclusion

Blue chip funds are commonly associated with mutual fund schemes that invest mainly in established large-cap companies. The term is not an official Securities and Exchange Board of India category, although these funds are generally linked with large-cap mutual funds. Their portfolio value may be affected by equity market movements, sector exposure, fund strategy, and the performance of underlying companies. Investors may review the scheme objective, portfolio composition, risk level, expenses, investment period, and applicable tax provisions before evaluating a fund. Fund comparisons may also be completed through the 5paisa platform after reviewing the available scheme information.