Blue-chip mutual funds invest in reputed companies trading on the stock exchanges and help you fulfil your investment objectives.
Mutual fund investments could be a somewhat confusing topic for many. But with proper knowledge and research, you will find that it could open new avenues of investment. In simple words, a mutual fund is an investment that collects money from investors and then invests in equities, bonds, money market instruments, and other securities. It is considered a viable investment option as it gives people the opportunity to invest in a diversified and professionally managed basket of securities.
The blue-chip fund is one of the many types of schemes that mutual fund offers. Let us dive into this topic to understand if this type of fund could help you achieve your financial goals.
Before we discuss what blue-chip funds are, let us understand what blue-chip means. A blue-chip is a nationally recognised, well-established, and financially sound company. Blue-chip mutual funds are schemes that invest in the stocks of these types of companies. In technical terms, they are equity mutual funds that invest in the stocks of companies with a larger market capitalisation.
According to SEBI, India does not have an official category called blue-chip funds. The term “blue-chip” is used as a synonym for large-cap funds. Large-cap funds invest at least 80% of the corpus in stocks of top 100 companies.
With blue-chip funds, you know that you are investing in stocks of companies in the top 100 in market capitalisation. Here are a few more features of a blue-chip fund to help you decide if it is a suitable investment for you.
Large, well-established companies are more stable compared to mid and small companies. Even during market volatility, they can offer stability because they have been in the industry for many years and have experience dealing with volatile, fluctuating markets.
Since blue-chip companies are well-established, you feel considerably assured that you will earn steady and guaranteed returns. Investors can rely on metrics like the past performance of funds, performance during bullish and bearish market trends, etc., to base their investments.
Big companies have expert corporate governance and employees with years of experience within the company. Hence, even during a volatile market, they are well-prepared to deal with unpredictable and unstable market conditions. These management skills inspire confidence among investors to stay invested.
Blue-chip companies have sufficient funds to finance their business and expansion plans. As such, they have enough cash flow and can quickly raise it if needed, through the public (by offering shares) or through their relationships with banks that provide them with instant lines of credit or loans.
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Having explained blue-chip fund meaning and features, let us analyse why they are a good investment option.
Blue-chip mutual funds are ideal for long-term goals as the longer you stay invested, the higher the probability to earn more returns. You can invest in blue-chip funds to create your retirement corpus, fund higher education for your children, etc.
Blue-chip companies are typically stable, with the capacity to generate steady returns in dividends, bonus shares, etc. These qualities make them an attractive investment option.
Blue-chip companies generally do not concentrate on one sector alone; they are spread across various sectors. This means, when you invest in blue-chip funds, you are investing in stocks of top companies in multiple sectors. Even when there is instability in one industry, your investment in other sectors is not hampered, which in turn mitigates your investment risks.
Since blue-chip companies are large and well-established with a long track record, they enjoy a competitive advantage over other companies in the same sectors. Therefore, they hold a significant market share and helps you earn inflation-adjusted returns over time.
A blue-chip mutual fund is an open-ended scheme, which means you can redeem or withdraw your investment whenever required. This feature proves advantageous for investors, especially in times of financial crisis, where they do not have to bear the burden of debt.
You must always check the track record of the companies the scheme invests in before taking a final decision. Blue-chip funds with significant Assets Under Management (AUM) are considered more favourable.
Check fund managers’ credentials and investment style handling the blue-chip funds, including the performance of other funds managed by them.
Check the performance of the blue-chip fund in the past 3 to 5 years. It is essential to select a fund that has outperformed the benchmark over time.
Checking the fund portfolio helps you understand where the fund invests. Some blue-chip funds could be significant and mid-cap funds. Hence, it is essential to study the fund portfolio.
With mutual fund investments, there is always an element of risk attached. However, investing in blue-chip funds is a more reliable investment, especially if you are a risk-averse investor. It would help if you stayed invested for the long-term to gain maximum benefits from your investment.
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*Disclaimer: This article is for information only. We recommend you get in touch with your income tax advisor or CA for expert advice.