What are Blue Chip Mutual Funds? Explore Types, Benefits, Risks and How They Work
For many investors, mutual funds have emerged as a strategic investment avenue alongside different asset classes to accomplish their financial objectives. Among the available mutual funds, blue chip funds stand out for their consistent performance over the years. However, consistency isn’t guaranteed and SEBI requires fund houses to provide accurate and clear disclosures in their fact sheets, which investors should review for up-to-date performance data. These funds are unique as they invest in blue chip stocks, large, well-established companies with robust financial structures. In this article, we will delve into the best blue chip mutual funds and the distinct advantages they offer.
What are Blue Chip Funds?
Blue chip mutual funds are investment vehicles that pool money from multiple investors to purchase shares in a diversified portfolio of blue chip companies. These professionally managed funds aim to invest in well-established and financially stable companies, typically in Nifty 50 companies. However, not all blue chip funds exclusively invest in Nifty 50 stocks. SEBI mandates that fund disclosures accurately reflect the investment strategy.
This article will specifically look at blue chip mutual funds’ types, features, benefits and risks. You also can learn more about the specific top 10 blue chip mutual funds in India from our collection article!
What are the Features of Blue Chip Mutual Funds?
The features of blue chip mutual funds are:
- Dividend Income: Many blue chip funds distribute regular dividends to their shareholders. The top blue chip mutual funds in India provide investors with a sense of security as they ensure a steady and reliable stream of returns and dividends.
- Cost-Efficiency: Index funds and passively managed blue chip funds tend to have lower expense ratios compared to actively managed funds. This cost-efficiency can translate into a more favourable investment experience.
- Investment Horizon: Blue-chip mutual funds are usually held for a long period of time, making it suitable for long term investors.
- Professional Management: Blue chip mutual funds are managed by seasoned fund managers who make investment decisions on behalf of investors. These professionals conduct thorough research, assess market conditions, and select the most promising blue chip stocks for the portfolio.
- Resilience to Market Downturns: Blue chip mutual funds have the potential to provide resilience and mitigate risk in case of market downturns. Blue chip stocks are often more stable during downturns compared to smaller companies, but they are not immune to market risks.
How Do Blue Chip Mutual Funds Work?
A blue chip mutual fund manages funds from individual investors and uses those funds to invest in blue chip companies. Fund managers make investment decisions on behalf of investors, selecting a mix of high-quality blue chip stocks to create a diversified portfolio.
Types of Blue Chip Mutual Funds
In India, blue chip funds fall into two broad categories
- Large-Cap Funds: Large-cap funds invest primarily in the top companies by market capitalisation, typically the top 100 listed companies on major stock exchanges like the NSE and BSE. These funds aim to reduce the risk associated with smaller or mid-sized companies by focusing on large, well-established firms. These funds are ideal for investors seeking stability, as they invest in companies that have proven track records of performance and financial strength.
- Index Funds: Index funds are passive funds that aim to replicate the performance of a specific market index, such as the Nifty 50. Unlike actively managed funds, index funds do not attempt to outperform the market; instead, they track the index’s composition and returns. This makes them cost-effective, as they typically have lower expense ratios compared to actively managed funds. For investors looking for broad market exposure with a focus on large-cap companies, index funds are a popular choice.
Benefits of Investing in Bluechip Mutual Funds
Blue chip mutual funds offer a range of advantages. Some of them have been listed below:
- Returns: By investing in companies with strong track records, the blue chip funds seek to deliver steady and reliable performance. This makes them suitable for risk-averse investors seeking to fulfil long-term goals.
- Liquidity: Blue chip funds in India can offer flexibility in redemption at any time. Especially in the case of open-ended mutual funds, as they allow investors to redeem units at the current NAV (Net Asset Value). Moreover, investors can use their fund units as collateral to secure loans. Investors invested in blue chip mutual funds are usually eligible for a loan against mutual funds (LAMF). Investors can apply for a LAMF at smallcase against their blue chip funds and acquire funds within a few clicks!
- Capital Appreciation: Investing in blue chip funds can cultivate substantial capital over an extended period. Thes funds often observe long term capital appreciation as they invest in high-growth and valued stocks. While blue chip funds can offer capital appreciation over the long term, but this depends on the underlying stocks’ performance.
Risks and Considerations When Investing in Blue Chip Mutual Funds
While these mutual funds offer stability and potential for consistent returns, it’s essential to be aware of the risks and considerations associated with these investments.
- Market Risk: Like every other mutual fund scheme, market risk persists with blue chip funds as well. When the market is in a bearish phase, despite their stability, blue chip funds are marginally affected by market downturns.
- Performance During Economic Downturns: Blue chip mutual funds tend to be resilient during economic downturns, but their performance can still be impacted. It’s crucial to assess how these funds have historically performed in challenging economic conditions and whether they align with your risk tolerance.
How to Invest in Blue Chip Mutual Funds?
You can easily invest in blue chip mutual funds by following these steps:
- To invest in mutual funds, you can visit an equity investment platform such as smallcase or Tickertape.
- The next step would be to research and identify the best blue chip funds to invest in which aligns with your investment thesis. You can easily select and learn more about the best blue chip funds with the help of a financial tool like the Tickertape Mutual Fund Screener. With 50+ pre-loaded filters, it helps you to create a comprehensive list by giving insights about the fund’s performance. Try it now!
- Once you have selected the funds based on different metrics and parameters, go to smallcase.com or the smallcase app, and login via your phone number. Click on ‘Discover‘ and enter the name of the specific mutual fund name in the search bar and hit enter. You can click on ‘invest now’ and select whether you want to invest a lump sum amount or start a SIP and start investing!
Why are Investors Interested in Blue Chips Funds?
Here are a few common reasons why investors favour these established best blue chip stocks:
- Most blue chip companies have established brand names that ensure better corporate governance. Blue chip mutual funds consist of stocks of companies that exhibit established histories, like most Tata Companies have been around for over 100 years.
- While blue chips may not generate high returns like mid-caps and small-caps, they offer lower risk, contributing to a more conservative risk profile, as these blue chip funds have the potential to provide resilience during market downturns and mitigate risks.
- Blue chip funds can frequently maintain stable dividend payment policies, enhancing predictability regarding shareholder return expectations.
Factors to Consider When Investing in Blue Chip Mutual Funds
- 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. However, the expense ratio should not be the only factor investors cosider when selecting suitable funds.
- Track Record of the AMC: You can review the asset management company’s (AMC) history before investing in a blue chip fund. Strong track records indicate resilience to large, unexpected withdrawals.
- Fund’s Portfolio: An investor can 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.
- Reinvestment and Compounding Benefits: Investors can consider reinvesting dividends and capital gains earned from your blue chip mutual funds. Reinvestment allows your returns to compound over time, potentially increasing your overall gains. For long-term investors, this method can be beneficial.
- Performance Against Benchmark: You can select blue chip funds that are outperforming the benchmark and their peers over time. Subsequently, you may monitor their performance records for the preceding three to five years to assess their ongoing success.
To Wrap It Up…
Blue chip mutual funds, being equity mutual funds, invest in large-cap companies recognised for their stability and lower susceptibility to market fluctuations. Hence, they offer a diversified portfolio of established companies with a consistent performance history, providing a relatively safer investment option for those with a long-term horizon. As always, investors must research and consult their financial advisors before investing in any mutual funds.
Frequently Asked Questions About Bluechip Mutual Funds
Blue chip funds focus on well-established, financially stable companies, offering stability and the potential for consistent returns. However, even blue chip funds are susceptible to market risks and investors should conduct their own research before investing.
Although blue chip funds have the stability of established companies in the portfolio, they are still subject to market downturns. Assessing your risk tolerance and investment objective is very important.
Yes. Investors may invest in blue chip mutual funds through smallcase! Once you have selected the funds based on different metrics and parameters, go to smallcase.com or the smallcase app, and login via your phone number. Click on ‘Discover‘ and enter the name of the specific mutual fund name in the search bar and hit enter. You can click on ‘invest now’ and select whether you want to invest a lump sum amount or start a SIP and start investing!
Large-cap funds invest in stocks with higher market capitalisation, and blue chip funds invest in stocks of well-reputed, established large-cap companies.
Here are some of the best blue chip funds for the long-term based on 3Y CAGR:
1. Nippon India Large Cap Fund
2. HDFC Large Cap Fund
3. ICICI Pru Bluechip Fund
4. Baroda BNP Paribas Large Cap Fund
5. JM Large Cap Fund
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