What are blue chip mutual funds?
Investing in mutual funds requires a careful consideration of risk appetite and return expectations. Among the diverse range of mutual funds, blue chip mutual funds stand out as essential additions to any investor’s portfolio. Whether you prefer index funds, equity funds, passive equity funds, or large cap funds, including blue chip funds can provide stability and relatively safe returns. Let’s delve into the Indian context and demystify blue chip mutual funds.
What are Blue Chip Funds?
Blue chip mutual funds revolve around blue chip stocks – investments in companies with renowned brand names such as HDFC, ITC, Nestle, Tata, Reliance, and Hindustan Unilever. These entities are considered market leaders and are known for generating consistent and stable yields over an extended period. Blue chip funds, therefore, offer exposure to a portfolio of such stocks, providing investors with a relatively low-risk investment avenue that delivers dependable returns.How do Blue Chip Funds Work?
Blue chip mutual funds typically have a low-risk profile compared to other equity schemes like mid-cap and small cap funds. They predominantly invest in the stocks of the top 100 companies listed on benchmark indexes, based on their market capitalization. These premier companies, with strong financial track records and future prospects, contribute to the fund’s potential to deliver robust yet stable returns. To enhance stability and diversification, these funds also allocate a portion of their corpus to debt instruments and cash equivalents. While they may not provide high short-term returns compared to riskier schemes, blue chip funds tend to grow steadily over time, making them suitable for long-term investment, especially for risk-averse investors.
Features of Blue Chip Funds:
- Returns: Blue chip funds offer returns in the form of dividends, leveraging the solid reputation of the invested blue chip companies.
- Creditworthiness: Companies in these funds have a notable creditworthiness, easily generating capital to settle financial obligations, making their shares highly creditworthy.
- Lower Risk Factor: The lower risk associated with these companies stems from their consistent financial performance, making blue chip funds well-suited for long-term investments.
- Steady Growth: Blue chip companies, having reached their maximum growth potential, exhibit a steady timeline of growth.
- Taxation: Short-term gains are taxed at 15%, while long-term capital gains exceeding Rs 1 lakh are taxed at 10%, plus applicable surcharge and cess.
Advantages of Blue Chip Funds:
- Optimal Capital Development: Blue chip funds facilitate optimal capital development, assisting investors in achieving financial goals.
- Long-Term Growth: With a strong track record, blue chip stocks contribute to the long-term growth of the portfolio, minimizing short-term volatilities.
- Stability in Turbulent Times: Companies with massive market capitalization, characteristic of blue chip stocks, withstand economic and sectoral turbulence better, ensuring stability in the portfolio.
- Liquidity: Blue chip stocks and the funds investing in them are highly liquid, allowing investors to redeem units or apply for loans when needed.
Blue Chip Safety Considerations:
When considering investments in blue chip companies or funds,it’s essential to:- Assess AMC Track Record: Evaluate the historical performance and withdrawal resilience of the Asset Management Company (AMC).
- Align with Risk Appetite: Ensure the fund’s investment style aligns with your risk appetite.
- Analyze Portfolio: Delve into the fund’s portfolio and benchmark its performance against relevant indexes.
Who Should Invest in Blue Chip Mutual Funds?
Blue chip mutual funds are ideal for risk-averse investors keen on long-term investments. However, they are versatile and suitable for all types of investors looking to diversify their portfolio and minimize risk. Both lumpsum and SIP (systematic investment plan) routes can be utilized for investment, making blue chip funds a superior choice in the Indian investment landscape.