What Are Bluechip Funds: How Does It Work?

Investing in bluechip funds in India can be a good option for those who want to invest in stocks but need more expertise or time to pick individual stocks. Bluechip Funds are mutual funds that invest in the stocks of large companies with a strong track record of performance and stability over time. These companies are leaders in their respective industries, have a large market capitalisation, and are generally considered relatively stable and safe investments.

Bluechip Fund Meaning

Bluechip funds refer to equity mutual funds that invest in stocks of large, established companies with a proven track record of good performance and stable returns. However, it’s important to note that the Securities and Exchange Board of India (SEBI) doesn’t have an official category for bluechip mutual funds. The term is often used interchangeably with large-cap funds.

It’s also worth noting that some mutual fund schemes may have the term ‘Blue Chip’ in their names, but this doesn’t necessarily mean they are true bluechip funds. For example, some schemes may be labelled as ’emerging’ bluechip funds, which are actually large and midcap schemes that happen to include the term in their name. Therefore, it’s essential to carefully consider a scheme’s investment strategy and objectives before investing, rather than simply relying on its name.

How does it work?

Blue chip mutual funds enable investors to participate in the financial growth of leading companies. These mutual funds primarily invest in stocks of the 100 largest companies by market capitalisation. To diversify their portfolios, these funds may also invest in bonds and cash equivalents.

Investors who are younger and have a longer investment horizon can tolerate the higher risk associated with investing in stocks. As a result, they may allocate a more significant portion of their portfolio to equities and stocks. Including bluechip funds in their core portfolio may provide stability to their overall investment strategy. Typically, these funds may constitute approximately 60% to 70% of an investor’s portfolio.

Types of Blue Chip Funds

Blue Chip Funds can be of primarily 2 types:

1. Large Cap mutual funds
2. Index funds that invest primarily in large cap companies that are blue chip.

Let us look at the meaning of these terms in detail.

1. Large Cap Funds: These funds invest primarily in the stocks of the biggest companies in the market, typically the top 100 by market capitalisation. Think Reliance Industries, Tata Consultancy Services, and Infosys. These giants offer stability due to their proven track records, strong financials, and wider brand recognition. They are considered less volatile than smaller companies, attracting investors seeking steady growth over the long term. However, actively managed large cap funds come with higher fees, as fund managers try to outperform the market, which isn’t always guaranteed.

2. Index Funds: These funds passively track a specific large-cap index, like the Nifty 50 or the BSE Sensex. They simply mirror the composition and weightage of the chosen index, aiming to deliver returns identical to the benchmark. Think of them as “owning a piece of the index.” With minimal fees and automatic diversification, they offer a cost-effective way to access the broader market. However, they forgo the potential for outsized returns of actively managed funds, as their performance is solely tied to the index’s movement. 

Remember that all index funds are not blue chip funds as many index funds can invest in small cap and mid cap or other sectoral indices which may not primarily invest in blue chip companies. 

Features Of Bluechip Funds

1. Stable and established companies:

   Bluechip funds invest in the stocks of companies that have a stable track record of performance, established business models, and a reputation for reliability. These companies are usually leaders in their respective industries and have a significant market share.

2. Diversified portfolio:

   Bluechip funds invest in a diversified portfolio of stocks from various sectors, including information technology, healthcare, banking and finance, and consumer goods. This diversification helps to mitigate the risks associated with investing in a single sector.

3. Consistent returns:

   Blue chip mutual funds are known for providing consistent returns over the long term, with lower volatility compared to other equity funds. This makes them a suitable option for risk-averse investors.

4. Professional management:eq

   Bluechip funds are managed by experienced fund managers who have a thorough understanding of the market and the stocks they invest in. These managers use their expertise to make informed investment decisions and maximise returns for investors.

5. Liquidity:

   Blue chip mutual funds are highly liquid, which means that investors can easily buy and sell their units at any time. This makes them an attractive investment option for those who require liquidity.

Advantages Of Bluechip Funds

1. Capital growth:

   Bluechip companies are well-established and have a track record of steady growth. Investing in bluechip funds in India can help investors benefit from the growth potential of these companies and earn a higher return on their investment over the long term.

2. Liquidity:

   Bluechip funds are generally highly liquid, which means that investors can easily buy or sell their holdings at any time without affecting the price of the underlying assets. This makes them an attractive option for investors who need access to their funds quickly.

3. Financial goals:

   Blue chip mutual funds in India can be a good option for investors who are looking to achieve their long-term financial goals, such as retirement planning or saving for a child’s education. These funds offer a diversified portfolio of stocks that can help investors achieve their goals with lower risk.

4. Economic moat:

   Bluechip companies typically have a competitive advantage or “economic moat” that makes it difficult for competitors to replicate their success. This can include things like brand recognition, patents, or a loyal customer base. Investing in bluechip funds in India can help investors benefit from this moat and earn a higher return on their investment.

Overall, bluechip funds in India offer investors the potential for capital growth, liquidity, a way to achieve their financial goals, and access to companies with a strong economic moat. However, as with any investment, it is important to do your research and understand the risks involved before investing.

Who Should Invest In Bluechip Funds?

Bluechip funds are ideal for investors who are looking for long-term investment options with a relatively lower risk. They are suitable for investors who seek stability and steady returns, as bluechip companies have a proven track record of stable performance.

These funds are also suitable for investors who want to invest in established and well-known companies that have a strong market position, high-quality products or services, and a history of consistent dividend payments.

Blue chip mutual funds are also recommended for investors who are just starting out and want to build a diversified portfolio, as these funds typically invest in a diverse range of companies across different sectors.

Overall, bluechip funds are a good fit for investors who prioritise stability and long-term growth over higher risk and potentially higher returns.

Bluechip Funds Safety Considerations

• Before investing in a bluechip company, it is important to examine the track record of the Asset Management Company (AMC) managing the funds. The AMC’s ability to handle large investor withdrawals is also crucial.
• Investors should also consider the investment style of the fund manager and ensure that it aligns with their risk appetite. The investment style should add value to the portfolio, whether it is focused on growth, value, or a combination of both.
• The expense ratio, which reflects the cost of running a mutual fund, should be considered when selecting a fund. Funds with lower expense ratios may yield better returns in the long run.
• Investors should conduct a thorough analysis of the fund’s portfolio to understand where their money is being invested. It is important to ensure that large-cap funds adhere to their investment objectives and are invested in both large-cap and mid-cap funds.
• Finally, investors should look for blue chip mutual funds that have consistently outperformed their benchmark and competitors over the past three to five years. This will help assess their performance and ensure that they are a good fit for the investor’s portfolio.

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