Trying to understand how blue chip funds work? Here’s a complete guide on blue chip funds, how it works, its advantages, benefits & how to invest in them.
Essentially, blue chip mutual funds are mutual funds of equity. These invest in stocks of companies that have a market capitalization which is large. Such companies are well-established, with a good performance track record. These kinds of funds do exist, but the Securities and Exchange Board of India, or SEBI, does not regard “blue chip” as an official category of mutual funds. Commonly, the term “blue chip” is used to refer to large-cap funds, the official term used. According to a mandate by SEBI, at least 80% of any corpus in shares of the best 100 companies (listed by market capitalization) are invested by large-cap funds.
Who should invest in blue chip mutual funds?
The best blue chip mutual fund in India attracts investors who want appreciation of capital in the long run. Furthermore, blue chip funds have the ability to provide consistently profitable returns. This feature is a draw for conservative investors too. These kinds of funds invest in renowned companies and if you want growth in your financial portfolio with reasonable stability, blue chip funds are a good idea.
Taxation on Blue Chip Mutual Funds
The gains/returns from the best blue chip mutual fund are taxed under STCG, or short-term capital gains, at the redemption time, for investments held for less than one year. The gains are liable for tax under LTCG, or long-term capital gains in case assets are held for one year or above. According to current tax rules, STCG tax is applied at 15% (plus cess and surcharge), and LTCG tax is applied at 10% (plus applicable cess and surcharge) without any benefit of indexation. Taxable returns can be directly calculated by subtracting the cost of investment from the proceeds of redemption. Moreover, investors can avail an exemption amounting to ₹1 lakh each year for long-term capital gains from equity-oriented mutual funds and equity shares in an aggregate.
Risks Involved in Blue Chip Mutual Funds
The best blue chip mutual fund invests in blue chip companies that are presently leading in the industry. These industries may include companies like McDonalds, Microsoft, and the like. Companies such as these are on the top of the list for the products they produce. Blue chip companies are typically established and well-received corporations that have shown financial stability over years. However, do blue chip funds come with any risk? Here are some risks to consider:
- Be sure to know the style that a fund manager follows – value or growth. In case the style doesn’t match your investment goals, you run the risk of disappointment with your fund.
- If you choose blue chip funds with high expense ratios, you are at risk for even lower returns on your investment.
- Blue chip funds may not be bulletproof, but they combat volatility better than funds in other sectors. Still, be sure not to sign up for a fund blindly. You should know what companies your fund invests in. The best blue chip mutual fund is not necessarily invested with company stocks of a high price, but rather, with a high quality.
Return Potential of Blue Chip Mutual Funds
The best blue chip mutual fund has historically proved its mettle in terms of returns for investors. In the past five years, these funds generally generate between 15% and 18% CAGR gains. Investors acknowledge such returns as favourable. In the long run, investment in equities, especially those of reputed blue chip companies, have the potential to generate high returns. Therefore, if you are an investor who wants to successfully beat inflation, then blue chip funds are the investment option for you.
From a long-term perspective, blue chip funds have the advantage of compounding effects. Thus, they build on existing wealth and grow it for investors. Blue chip companies have a robust business model relative to smaller and mid-level firms. Blue chip companies have stood the test of time and are not emerging like smaller companies. Their growth is proven and profits known by way of reliable dividend payouts to shareholders. Consequently, companies with a large market capitalization are called blue chip companies, the best pick of the bunch of firms to invest your wealth in with the best blue chip mutual fund available.
A Blue Chip Fund’s Compounding Effect with Respect to Time
When you invest in blue chip mutual funds, the power of compounding is at play. This is an advantage while investing in blue chip funds. As a result of compounding, an investor is able to earn a return due to the principal invested, along with returns that get accumulated on the initial investment made, over a period. Hence, the longer you are with your fund, the better your profits can be.
Advantages of Blue Chip Mutual Funds
The best blue chip mutual fund comes with a plethora of advantages today. These are highlighted below:
- Promising returns- Investing in blue chip mutual funds can get you somewhat guaranteed returns relative to funds that invest mid-cap or small-cap stocks. These are in the form of dividends that companies generate, apart from returns you get through the performance of the company.
- Creditworthiness – Blue chip fund companies have creditworthiness as these are stable companies that are financially sound and can pay dues and clear obligations with ease.
- Less Risk – Investments in companies that are labelled “blue chip” come with less of a risk for an investor. This is because these companies proved themselves with great performance in the past.
Reasons to Invest in the Best Blue Chip Mutual Fund
The reasons to invest in blue chip mutual funds overlap with the features and advantages of these funds. Blue chip mutual funds, as mentioned earlier, invest in companies that are large-cap in nature, with a history of high profitability. As these companies are financially sound, they can be secure investments in the long run. Blue chip funds can help build a corpus by growing capital, and facilitate portfolio diversification too.
If you are an investor who may not wish to invest in direct equity, any best blue chip mutual fund may be suitable as an investment tool for you. You still get to invest in great company stocks and are generally good returns, more or less. Portfolio diversification is also taken care of and you get to grow your wealth in the long term. Considering the risk associated with these funds are very minute, these funds can be very beneficial for you.
- Is the best blue chip mutual fund safe?
Blue chip mutual funds invest in shares of corporations with a reputation for consistent dividends and constant profit generation over long periods. Hence, these are among the more safe investments.
- What is the difference between a large-cap fund and a blue chip fund?
The terms large-cap fund and blue chip fund are essentially the same and used interchangeably. They both represent funds that invest in large-cap company stocks.
- How do you know if a company is a blue chip company?
To be classified as a blue chip company, a firm must be well-established with a large market capitalization and a history of sound financial health.
Disclaimer: This blog has been issued on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this document is for general purposes only and not a complete disclosure of every material fact. The stocks/sectors mentioned herein is for explaining the concept and shall not be construed as an investment advice to any party. The information/data herein alone is not sufficient and shouldn’t be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. All opinions, figures, estimates and data included in this blog are as on date. The blog does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on our current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Readers shall be fully responsible/liable for any decision taken on the basis of this article.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.