Introduction
In the stock market, blue chip companies are the titans. They speak about the company's performance, they are popular, and have a high market value. As a result, investors seek exposure to blue chip funds to build a strong portfolio that outmatches inflation.
But, it is important to consider all the variables of a blue chip fund. This blog highlights the blue chip funds meaning, how it works, and their features.
What are blue chip funds?
Blue chip stocks or blue chip mutual funds are the most popular stock market investments. The stocks with a brand name, like Tata, Reliance, Hindustan Unilever, etc., are all classified as blue chip companies.
But, what are blue chip mutual funds? A blue chip fund is an equity scheme that offers its investors a portfolio of stocks that generate solid and stable yields for a long time. These stocks are high-market companies, meaning the risk factor is relatively low. One can also consider blue chip funds as a sound financial scheme with decent returns.
How does it work?
Blue chip companies have a strong financial track record, which enables investors to profit from them. Most of the blue chip funds' holdings are stocks of the top 100 market-cap companies. These funds can also be invested in bonds and cash equivalents to diversify the portfolio. blue chip companies have a longer spectrum for investment. Thus, the cost of the blue chip funds is relatively higher.
Features of blue chip funds
● Assured returns
blue chip funds generate returns as dividends. The blue chip companies are well-established and serve as a safe investment avenue. An assured income and steady returns are guaranteed.
● Creditworthiness
blue chip companies can easily generate enough capital to clear their financial dues. Hence, this makes shares issued by such companies highly creditworthy.
● Risk factor
With steadiness in financial performance, the stocks issued by these companies have a lower risk factor.
● Investment horizon
blue chip funds are suitable for long-term investments. Investing in these stocks or funds helps greatly in achieving financial goals.
● Growth prospect
blue chip companies are those that have reached their maximum growth potential. Therefore, a steady timeline of growth is a characteristic of blue chip shares.
● Taxation
As per the Income Tax Act, Section 80C, short-term goals are subjected to taxation at a rate of 15%. The taxation rate is 10% for gains exceeding Rs 1 lakh.
Advantages of blue chip funds
● Capital development
You can develop abundant capital over the long haul by investing in blue chip funds. Investing in a company with a strong track record creates the scope for making a solid portfolio. Additionally, it provides stability during unpredictable stock market situations.
● Monetary goal
Investing in a blue chip fund fulfils the objective of accomplishing long-term financial goals.
● Economic moat
Blue chip organisations may benefit from an economic moat in light of their scale. The competitive advantage of blue chip companies over other companies equates to a large share market and helps accomplish long-term gains that beat inflation.
● Liquidity
blue chip funds can be redeemed whenever you want to get out of the financial muddle. You can also apply for a loan against blue chip fund units.
Who should Invest in Blue Chip Funds?
With consistent returns and a lower risk factor, blue chip stocks are ideal for investors who want their investments to remain unaffected by market volatility.
Blue chip Safety Considerations
● Track record of the AMC
Before investing in any blue chip company, one must look into its track record. Additionally, these funds can withstand huge investors' unpredicted withdrawal pressure.
● Investment style
Investors must choose funds that suit their risk appetite. Checking on the fund manager's investment style is equally significant. It must add value to the portfolio that favours growth, value, or a combination of both.
● Expense ratio
The expense ratio is the expense of running a mutual fund. Choosing funds with a lower expense ratio may give you more returns over time.
● The fund's portfolio
An investor must conduct a thorough portfolio analysis to know where the blue chip fund is investing. These are large-cap and mid-cap funds, ensuring that the large-cap fund adheres to its investment objectives.
● Performance against benchmark
Select blue chip funds that have outperformed both the benchmark and their competitors over time. Then, track their records for the past three to five years to check their performance.