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This article has been written by Shivani Bharti from Symbiosis Law School, Pune, pursuing the Diploma in General Corporate Practices from LawSikho. This article has been edited by first evaluator Amitabh Ranjan (Associate, Lawsikho) and Dipshi Swara (Senior Associate, Lawsikho). 

Introduction

A majority of a Blue Chip mutual fund is invested in Blue Chip stocks. These are stocks in well-known companies with a strong track record of long-term performance. We’ll learn more about Blue Chip funds, how they work, and more in this article. 

The origin of ‘Blue Chip’

In 1923, a Dow Jones employee named Oliver Gingold developed the term ‘Blue-Chip.’ Gingold coined the term after noticing many stocks trading at $200 or more per share while standing near a stock ticker at a brokerage firm. He used the term ‘Blue-Chip Stocks’ to describe them and authored an article on them. The name ‘blue-chip’ was coined as a result of this. The term has been used to refer to high-priced stocks since then, although it is currently used to refer to high-quality stocks. 

What exactly is Blue Chip funds? 

Blue Chip funds are mutual funds that invest in the equity of significant companies with a high market capitalisation. These are well-established businesses with a long track record of success. However, according to SEBI mutual fund classification, there is no formal category for Blue Chip funds. The term ‘blue chip’ is frequently used to refer to large-cap funds. 

Some mutual fund schemes may have Blue Chip in their name, which is preceded by the word ‘emerging.’ These are large and midcap schemes that solely contain the term ‘Blue Chip’ in their name. Therefore, it is advisable that one should not choose a scheme solely because it’s called Blue Chip. Large-cap funds must invest at least 80% of the corpus in the top 100 companies by market capitalization, according to the SEBI mandate. Blue Chip funds, which invest in the top 100 companies, have a similar description.

How do Blue Chip mutual funds work?

Blue Chip funds enable investors to profit from Blue Chip companies’ financial success. Blue Chip mutual funds mostly invest in the equities of the top 100 companies in terms of market capitalisation. These funds can invest in bonds and cash equivalents for some diversification. As younger investors can tolerate the higher risk associated with these companies because they have a longer investment horizon, they can allocate a larger amount of their portfolio to stocks and equities. To build your core portfolio, you can invest in Blue Chip funds. It accounts for 60% to 70 % of your portfolio and provides stability.

The safety of Blue Chip stocks

While a Blue Chip firm or company may have weathered a number of adversities and market cycles, this does not always imply that it is a secure investment. There are cases and evident possibilities when even the most successful companies can stumble during times of extreme market stress.

Blue Chips as part of a larger portfolio

While blue-chip companies are appropriate as core assets in a bigger portfolio, they shouldn’t make up the entirety of it. Bonds and cash are typically included in a diversified portfolio. An investor should consider buying mid-caps and small-caps as well as large-caps in their stock portfolio. Younger investors can generally tolerate the risk associated with investing a bigger portion of their portfolios in stocks, including blue chips, but senior investors may want to focus on capital preservation by investing more in bonds and cash.

Advantages of investing in Blue Chip funds

Capital growth

You can grow wealth over time by investing in Blue Chip funds. It enables you to invest in financially healthy businesses with a proven track record of success. Blue Chip funds can be included in the main portfolio to provide stability in the face of unpredictable stock markets.

Financial goals

You may consider investing in Blue Chip funds to achieve your long-term financial goals. For instance, you could invest in Blue Chip funds for the long term to buy a house or for retirement plans. 

Economic moat

Blue Chip companies may benefit from an economic moat because of their scale. It’s a competitive advantage these businesses have over their competitors and colleagues. It equates to a large market share and helps you achieve long-term gains that outperform inflation.

Liquidity

Blue Chip funds are open-ended, which means you can immediately redeem units. It allows you to get out of an investment when you’re in a financial bind. You can also take out a loan against Blue Chip fund units.

Blue Chip safety considerations

Track record of the AMC

Before investing your money, you should look into the AMC’s (asset management company) track record. If you choose Blue Chip funds with big assets under management, it will help (AUM). Furthermore, these funds can withstand huge investors’ unexpected withdrawal pressure.

Investment style

You should look at the fund manager’s investment style and choose funds that you are comfortable with. For example, the fund management may favour growth, value, or a combination of both.

Expense ratio

Blue Chip funds with a reduced expense ratio are the way to go. It is the expense of running a mutual fund. Furthermore, choosing funds with a lower expenditure ratio may allow you to earn a little more money over time.

The fund’s portfolio

To obtain an indication of where the Blue Chip fund invests your money, look at its portfolio. Ascertain that the large-cap fund adheres to its investment objectives. Don’t be deceived by the moniker Blue Chip; look at the portfolio because some Blue Chip funds are large-cap and mid-cap funds.

Performance against benchmark

Check the performance of the Blue Chip fund versus the benchmark during the last three to five years. Furthermore, you must choose Blue Chip funds that have beaten their rivals and the benchmark over time.

Best Blue Chip stocks in India

Before we get into talking about the best Blue Chip stocks in India, it’s worth mentioning that some people associate Blue Chip stocks with blue betting discs in poker, with the blue disc having the highest value and the white disc having the lowest. Blue Chip companies can be identified using a variety of criteria. Along with market capitalization and price-to-earnings ratio, they include steady annual revenue over time, a stable debt-to-equity ratio, average return on equity (RoE), and interest coverage ratio (PE). According to market capitalization, there are a few Blue Chip firms whose stocks will provide good long-term returns.

Here is a list of the top 10 Blue Chip stocks that are faring well in the stock market:

  • Indian Tobacco Company (ITC) Limited,
  • Infosys,
  • Hindustan Unilever Limited (HUL),
  • Tata Consultancy Services (TCS),
  • State Bank of India (SBI),
  • Reliance Industries,
  • Housing Development Finance Corporation (HDFC),
  • Oil and Natural Gas Corporation (ONGC),
  • Eicher Motors,
  • Sun Pharmaceuticals Industries Limited.

How to invest in Blue Chip stocks and funds?

A Demat account is required to invest in Blue Chip Stocks. Investors can invest in preferred stocks directly or through a broker. When you invest through a broker, though, you must pay a brokerage charge. If you wish to put money into Blue Chip funds, you can do it in two ways:

  • Online: Blue Chip Funds can be purchased online through online platforms or directly through the websites of the AMCs that offer the fund. Some top mutual funds in the country are Canara Robeco Bluechip Equity Fund, Axis Blue Chip Fund, BNP Paribas Large Cap Fund, DBI India Top 100 Equity Fund, Kotak Bluechip Fund, etc. 
  • Offline: This traditional method of investment entails filling out a form and submitting it to a fund house location near you, or investing through a broker. 

Investing in Blue Chip funds 

When compared to other mutual fund schemes, blue-chip funds are more expensive. It is popular and expensive due to the reliability it provides. Investors must understand how these funds operate. Blue Chip funds can help you develop a stable portfolio. Only investing in Blue Chip funds, on the other hand, can result in lesser returns. Investors should diversify their portfolios.

Higher returns can be obtained through equity plans, mid-cap funds, and other similar investments, but they can also raise the risk. When a person invests in Blue Chip funds, however, they can build a well-balanced portfolio. Blue Chip funds’ dependability can boost returns. Blue Chip funds can help high and medium-risk investors diversify their holdings effectively. Short-term investments in Blue Chip funds may not help an investor’s financial situation.

In the event of adversity, blue-chip funds provide more consistent returns than other funds. Many investors desire Blue Chip stocks in their portfolio because they are low-risk. Investors should be aware, however, that Blue Chip funds can be costly. Blue Chip funds are a good option for investors who want to earn a good return while taking moderate risks. Even in hard times, Blue Chip funds have a track record of delivering returns. If an investor seeks a steady increase in returns, Blue Chip funds are the way to go.

Conclusion

You can increase your wealth over time by investing in a Blue Chip fund to achieve your long-term financial goals. It allows you to invest in financially sound businesses and achieve long-term gains that outmatch inflation. It is important to tread with caution when it comes to investing, hence it is advisable to keep the provided Blue Chip safety considerations in mind.

References


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