What are blue chip mutual funds? Meaning, advantages & features

Seasoned investors pick their mutual funds based on their risk appetite and return requirements and amidst all the varied types of mutual funds, blue chip mutual funds are schemes which should be a part of every investor’s portfolio. Whether you prefer to invest in index funds, equity funds, passive equity funds or large cap funds, making blue chip funds a part of your portfolio can offer you stable and comparatively safe returns. If you are curious about these schemes, here is all you need to know about blue chip fund meaning, and blue chip equity fund. Let us begin by answering the burning question of what are blue chip mutual funds.

What are blue chip funds?

Blue chip stocks and mutual funds represent some of the most favoured investments in the stock market. Companies with renowned brand names, such as HDFC, ITC, Nestle, Tata, Reliance, and Hindustan Unilever, among many others, fall into the category of blue chip entities. Accordingly, a blue chip fund is an equity scheme designed to provide investors exposure to mutual fund portfolios comprising stocks known for generating consistent and stable yields over an extended period. Typically, these stocks belong to high-market companies, thereby presenting a relatively low-risk factor. In essence, blue chip funds can be regarded as robust financial schemes offering dependable returns and are well-suited for investors keen on stable returns at low risk.

How do blue chip funds work?

If you are keen on participating in the potential unlocked by blue chip mutual funds, you would be curious about how these schemes work. Well, these schemes, which usually have a low risk profile when compared with other equity schemes like mid-cap and small cap funds, invest a majority of their corpus in the stocks of the top 100 companies listed on benchmark indexes, on the basis of their market capitalisation. Given the strong financial track record and future prospects of these premier companies, blue chip mutual funds stand to make robust yet stable returns, which are then passed on to investors like yourself. Additionally, to maintain their safety parameter, these funds also allocate a portion of their corpus to debt instruments and cash equivalents, thereby augmenting their stability and ensuring optimal diversification. While these schemes may not offer high returns akin to those offered by riskier schemes, in the short-term, they tend to grow over time, making them an excellent long-term investment vehicle for risk-averse investors.

Features of blue chip funds

Now let us take a look at the myriad features of blue chip mutual funds. Firstly, these funds provide assured returns in the form of dividends, leveraging the solid and established reputation of blue chip companies, thus offering a secure avenue for investment with a promise of steady income. The creditworthiness of these companies is notable, as they can effortlessly generate adequate capital to settle financial obligations, rendering the shares they issue highly creditworthy. Additionally, the lower risk factor associated with these companies stems from their consistent financial performance. Blue chip funds are particularly suited for long-term investments, aligning well with the investment horizon required for achieving financial goals. Given that blue chip companies have typically reached their maximum growth potential, the shares exhibit a steady timeline of growth. Finally, in terms of taxation, short-term gains (for investments held for less than a year) are subject to a 15% tax rate under the Income Tax Act, while long-term capital gains (for investments held for more than a year) exceeding Rs 1 lakh are taxed at a rate of 10%.(plus applicable surcharge and cess in both cases).

Advantages of blue chip funds

Blue chip mutual funds are an excellent avenue of investment for all types of investors, owing to their varied advantages, beginning with their ability to facilitate optimal capital development and enable the achievement of financial goals. Given the strong track record of blue chip stocks, your portfolio will be poised for long-term growth, while also avoiding short-term volatilities which tend to dishearten risk-averse investors. Secondly, since blue chip stocks are companies which have a massive market cap, they are able to withstand economic and sectoral turbulence better than smaller companies, making them a great addition to your stable and long-term portfolio. Finally, these stocks, and thereby the schemes which invest in them, are highly liquid, ensuring that you can redeem your units or apply for a loan against the scheme whenever you are pressed for money.

Blue chip safety considerations

When considering investments in blue chip companies or funds, certain key factors should be meticulously examined. Firstly, assessing the track record of the Asset Management Company (AMC) is imperative, as it provides insights into the entity's historical performance and its ability to withstand significant investor withdrawal pressure. Further, it is crucial to align the investment style of the fund with the investor's risk appetite, while also considering the expense ratio, which represents the cost of running the mutual fund. Opting for funds with lower expense ratios can potentially yield higher returns over time. Delving into the fund's portfolio and benchmarking the scheme’s performance against relevant indexes can also help you ascertain the mutual fund’s ability to augment your personal portfolio.

So, who should ideally invest in blue chip mutual funds? Given their ability to offer stable yet secure returns, these schemes are well-suited for risk-averse investors keen on long-term investments. Additionally, all types of investors can consider adding these schemes to their portfolio, for the purpose of diversification and minimising portfolio risk, and this can be done through both the lumpsum and SIP (systematic investment plan) routes, making it a superlative investment option.

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