Blue Chip Fund: Meaning, Features, Advantage

Economic uncertainties tend to push many investors to conservative investment options in a bid to safeguard their wealth. It is a safe strategy, though not always very paying.Also, the markets need not be your foe; you can always tap into other options that can withstand market turmoil just as well, and also fetch good returns; securities such as blue chip funds, for instance . These can help your portfolio more than you think. The following article discusses how, and will also help you discover the potential of blue chip funds and highlight their key aspects.But before we begin exploring what is a blue chip fund, let us understand what blue chip companies are.

The term “blue chip” is associated with companies that are financially stable, and known for steady revenue generation, profitability despite economic downturns, and ensuring solid returns for shareholders; as such, blue chip companies are considered safe investments.They are listed on major stock exchanges and boast of large market capitalization. Moreover, they are reputed with well-known brands, boast of robust market presence, and frequently outshine their peers.A few examples of blue chip companies in India are ITC Ltd., Tata Consultancy Services, Hindustan Unilever, and Infosys.

Blue chip funds are large-cap mutual funds or ETFs that focus on stocks of well-established and consistent companies.The holdings are carefully diversified across a selected group of blue chip stocks, which enables investors in these funds to benefit from a combination of capital appreciation and steady income generation. The underlying assets make these funds less volatile.

Origin

The term blue chip owes its origin to the card game poker, where players use casino tokens or poker chips in various colors in lieu of currency notes; among these tokens, the blue chips are the most expensive.Oliver Gingold, an early employee at Dow Jones, is credited with coining the phrase "blue chip” in 1923 to denote stocks with high value. The story goes that Gingold, while standing near the stock ticker at a brokerage firm, noticed several stocks trading at $200 or more per share, which he called "blue chip stocks".The usage caught on, and while earlier the term would be used to refer to highly priced shares, it is now more commonly used to refer to high quality stocks.

Here are some of the prominent features of blue chip funds:

1. Dividend Income: Blue chip companies are established and hence pay regular dividends, making returns from these funds almost guaranteed. This makes these funds attractive to income-seeking investors.
2. Stability and Reliability: These funds focus on companies with a history of stable earnings and strong financials, providing investors with a sense of security and reliability. These companies also generate enough income to keep their financial dues clear, making their shares highly creditworthy.
3. Less Risky: While all investments carry some level of risk, blue chip funds are generally considered less risky compared to mid-cap and small-cap funds due to the stability of the companies they invest in.
4. Long-Term Growth: These funds are suitable for long-term investors who seek steady growth and capital appreciation over time.
5. Gradual Growth: Blue chip companies are companies that have more-or-less reached their full growth potential. Hence, a blue chip fund will also represent a graph of steady growth.
6. Taxation: As per the Income Tax Act, Section 80C, short-term capital gains (STCG) from investments like blue chip funds are taxed at 15% whereas income exceeding Rs. 1 lakh is taxed at 10%

Blue chip funds suit investors with a high-risk tolerance to adopt an aggressive investment strategy. By allocating a significant portion of these funds towards equity, one can expect substantial returns over time, but there is also the exposure to high risk.It is for this reason that for investors with low risk appetite, say someone nearing the age of retirement, blue chip funds are a good option, as these offer decent returns on investments. But as they also create wealth over a longer period of time, younger investors can consider these as well.Blue chip mutual funds can be a great source of a regular stream of income, but investors should not rely on them solely to avert risk. To make the most out of these funds, the timing of investment is also important. Check out when is the right time to invest here so your portfolio can get the most out of them

Below is a list of positives from investing in blue chip funds:

1. Capital appreciation: Offering stable and consistent returns even in times of economic downturns is one of the prominent aspects of blue chip funds . Compared to regular stocks, sector-specific blue chip funds such as FMCG, pharma, healthcare etc., manifest more resilience during challenging market conditions.
2. Long-term goals: Blue chip funds are ideal for investors with long-term financial goals because of capital appreciation over a long period. Many investors see these funds as an ideal fit for goals that are at least five years away.
3. Easy trading: The reputation of blue chip stocks , which these funds invest in, makes it easier to buy and sell them.
4. Diversification: If “high risk equals high reward” is your strategy, then you can bring stability to your portfolio with investments in a variety of blue chip funds. Even if you plan to dedicate a portion of your funds towards riskier investments, the possibility of incurring a loss is minimal. And that is because of the operational efficiency and multiple revenue streams that contribute to a secure investment landscape.
5. Fraud reduction: Blue chip companies are not intensely burdened by debt which reduces the chances of the company making losses in near future.
6. Brighter prospects: Having experienced management team paves the way for a brighter future for blue chip companies. The expertise that these teams bring to the table helps strengthen the resilience of these funds.

There may be some more benefits you can earn from blue chip funds; find out here .

If you are considering investing in blue chip funds, it is advisable to check a few points before taking the plunge. Below are a few pointers:

1. Performance history of the Asset Management Company (AMC) It is advisable to check the performance history of AMCs before selecting one. Check if the fund managed by the AMC concerned was able to withstand any substantial withdrawals from investors in the past.
2. Investment style of the fund manager Mutual fund investors look for either growth or value. This means they either seek stocks that show earnings growth, or they seek stocks that are undervalued. The investment style of the fund manager will be based on either of these. Make sure it aligns with your goals.
3. Look for the expense ratio Expense ratio in mutual funds is the percentage of fund assets spent on administrative, management, advertising, and other overheads. A lower expense ratio can result in higher returns in the long run. Always compare the expense ratios of different funds before deciding on one.
4. Portfolio of the Fund Comprehensively analyze the fund’s portfolio. Examine where the fund is allocating its corpus (large-cap or mid-cap) to ensure it abides by the stated investment objectives.
5. Performance beats benchmark Go for blue chip funds that have a record of beating the benchmark and its competitors in the past. Track the performance of past three to five years in order to evaluate consistency.

Everything comes with its pros and cons. But the reasons you should invest in Blue Chip Funds are stronger than the reasons you should not.

If you are seeking a regular flow of returns, blue chip funds are an excellent option in the short to medium term. It is obviously crucial to research thoroughly and pick what aligns with your goals adequately.You may have come across schemes such as “emerging blue chip funds”. These funds are a combination of large and mid-cap funds. So, make sure you check before selecting picking any.Diverse revenue streams help large cap companies withstand economic challenges. These diverse revenue streams make blue chip funds a more secure choice for investors.