Understanding Blue Chip Funds
Created on 08 Dec 2020
Wraps up in 4 Min
Read by 2.2k people
Updated on 12 Sep 2022
Are you a gamer? Do you love to play games? Well, gaming is a fun and exciting activity that is loved by almost everyone. One such popular game is the card game Poker, which has been played over for many decades across countries.
Did you know that this Poker is also the reason behind the terminology of a type of investment fund? They are the“Blue chip funds”.
The term “blue chip” originates from the game of poker, in which the blue chip is the game's most expensive chip. As said, the term is very much prevalent in the world of the stock market.
Let’s get in and understand what blue chip funds are.
What are Blue Chip Funds?
According to SEBI's categorization of mutual funds, there has been no official classification for blue chip mutual funds. Still, several mutual fund houses and advisers use blue chip funds as a synonym for large-cap funds. There have been numerous large-cap mutual funds in India with the word blue chip in their names. For example, ICICI Prudential Bluechip Fund, Axis Bluechip fund, SBI blue-chip Fund, etc.
Also, there are some schemes that use ‘bluechip’ in their name, following the word emerging. Some of these schemes are the Principal Emerging Bluechip Fund, Mirae Asset Emerging Bluechip Fund, etc. It is important to note that all these funds are large and mid-cap funds.
Therefore, having the name bluechip doesn’t necessarily mean that those funds invest entirely in bluechip companies. Now, what are blue chip companies?
Blue chip companies are extremely big companies that come with promising financial stability and a huge distribution network. These companies deal with great quality products and services. Such companies have good recognition in the home country as well as abroad.
How do the Blue chip funds work?
As said above, Bluechip mutual funds and large-cap funds are one and the same thing. Both of them are open-ended equity funds. They invest a minimum of 80% of their assets in large-cap companies. Large-cap companies are among the top 100 companies by market capitalization.
The fund administrator strategically selects the large-cap stocks that align with the fund’s investment goal. These funds advantage from the development of blue-chip companies or large-cap companies.
Besides this, the fund manager invests the remaining 20% of the total assets across the other asset classes and categories. For example, the manager of a portfolio invests in mid-cap stocks or bonds or in cash equivalents as well.
Though these funds are pure equity funds, they are comparatively less volatile than other equity schemes like mid-cap mutual funds and value mutual funds, small-cap funds, etc.
The large companies that the fund invests in, protect the portfolio from volatility. Large-cap funds or blue-chip mutual funds have the capacity to produce substantial returns in the long term. Thus, it should have a long-term investment horizon for investing in such mutual funds. Those individuals who are looking for short-term investments can invest in debt funds.
Which are the much sought-after blue chip funds for investment?
Below are some of the best-performing blue-chip funds in India:
Axis Bluechip Fund
HDFC Top 100 Fund
ICICI Prudential Bluechip Fund
ICICI Prudential Bluechip Fund Institutional Option 1
Mirae Asset Large Cap Fund
Factors to be kept in mind while investing in Blue Chip Funds
Expense ratio: The fund house demands a fee for its management. The fee, thus charged by the fund house, is realized as the expense ratio. It is crucial and better to invest in a fund that possesses a lower expense ratio so that the investor can be able to generate substantial returns.
Fund performance: Investors should always look into the historical performance of a fund before making any investment decision. Though past performance doesn’t guarantee future returns to the investor, it still acts as a guide on how the fund's performance has been during different market conditions.
Exit load: The fee charged by a fund house for early redemptions, is known as the exit load. For equity mutual funds, the exit load is approximately 1% for redemptions that are done in one year from the date of investment.
Portfolio manager: The knowledge and experience of a portfolio manager have an important impact on the fund's performance. In other words, the judgments made by the fund manager and the strategies adopted by them play a significant role in the fund’s performance. Hence, it is necessary to consider the manager’s experience and aptitude while investing in a fund.
Other performance pointers include the Sharpe ratio, Treynor ratio, portfolio turnover ratio, etc.
Who should invest in the Blue Chip funds?
As said earlier, large-cap mutual funds are open-ended equity mutual funds. Therefore, a long-term investment boundary gives substantial results. Investors who are intending for capital appreciation for long-term financial objectives like retirement, or child’s education, or anything, could look at investment in them. These mutual funds invest in large-cap companies.
Large-cap companies are well-established businesses. They are financially safe and stable, and hence are more resilient to market volatility in comparison to mid and small-caps. The best thing is that they could operate even during the phase of economic downturns.
Accordingly, investors who want equity exposure that too with a reasonable understanding of risk could invest in blue chip funds.
This mutual fund scheme is highly liquid, the reason being that large-cap companies are highly followed and looked at in the market. Hence, investors who are pursuing easy withdrawals without having to face the difficulty of liquidity can invest in such types of funds.
The non-financial enthusiasts feel that they can only invest in stocks, but that is not the case. There is a list of opportunities waiting out there to be grabbed by all intellectual investors. Blue-chip funds are one such category where you could make your investment.
As said earlier, blue chip funds are similar to large-cap mutual funds. But, whether you should invest or not or what factors should be considered while investing in such funds, is a different dilemma.
So, if you are planning to make investments via blue chip funds, then start your analysis by reading the above-mentioned points again.
Happy(and smart) investing!!
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