When you invest in the mutual fund market, you have a medium-to-long-term goal in mind. Because there is a diversity of schemes available, you can pick the one(s) that best meets your goals. For many investors, stable returns is a priority as opposed to, say, high returns that come with high risk. If you belong to this category, blue-chip mutual funds (MF) are the right fit for you.
So, what is a blue-chip mutual fund and what are its advantages? These are essentially large-cap funds that promise steady returns at all times. Let’s get down to the details of blue-chip MFs in this article.
How did the term blue-chip come into existence?
The term ‘blue-chip’ in reference to stocks first came into existence in 1923 when Oliver Gingold, a Dow Jones worker, coined the phrase. Gingold noticed, while standing near a stock ticker at a brokerage firm, that several stocks traded at $200 or more per share.
So, originally, ‘blue-chip’ referred to highly-priced stocks. Today, it is a term commonly used for high-quality stocks.
What are blue-chip funds?
So, what is a blue-chip company? A blue-chip company is one that enjoys wide acclamation for its products and services. Its excellent performance reflects its profitability. As a result, its stocks are the safest and the least volatile to invest in.
A blue-chip mutual fund makes investments in blue-chip stocks, i.e., in companies with excellent financial performance. These funds are ideal for investors looking for less volatility and more stability.
Additional Read: What percentage of your income should you save at every age?
How do they work?
Investors who purchase blue-chip funds benefit from the financial growth of blue-chip companies. For purposes of risk diversification, blue-chip funds may be invested in bonds, mid-cap stocks, and cash equivalents. Young investors can choose to invest in stocks as the long investment horizon balances out the risk. On the other hand, older investors can rake the safe route by investing in bonds or cash.
Features of a blue-chip fund
Listed below are some of the top features of a blue-chip mutual fund –
• High credit-worthiness
Shares of blue-chip stock companies are high in credit-worthiness. This is because these companies usually have sufficient capital to clear their financial obligations easily.
• Low risk
Investing in blue-chip stocks offers investors the dual risk benefit. Firstly, the stable financial performance of these companies ensures that their stocks are not easily affected by market volatility. And secondly, since these companies naturally diversify their risk by generating revenue from different channels, investors are further cushioned against unfavourable market conditions.
• Investment horizon
Blue-chip mutual funds usually have an investment horizon that goes beyond 7 years. This makes these funds perfect for meeting long-term financial goals.
• Steady growth prospect
Blue-chip stocks grow in valuation at a slow but steady pace. This is because these companies have typically reached or are nearing their growth potential. This translates to assured returns for investors
Section 80 C of the Income Tax Act, 1961, treats the gains generated from blue-chip funds as income. As a result, the short-term capital gains are taxed at a flat rate of 15%. On the other hand, long-term capital gains that exceed Rs. 10 lakhs are subject to taxation at the rate of 10%.
Advantages of investing in blue-chip funds
• Stable and steady returns
Blue-chip stocks remain unaffected even by severe market fluctuations. Since they are typically well-performing stocks, you will receive stable and steady returns on your portfolio.
• Ideal for post-retirement planning
These mutual funds come with an investment horizon of over 7 years. As a result, blue-chip funds are ideal for achieving long-term financial goals such as post-retirement planning. You can also build a healthy corpus for your child’s education, their wedding, and more.
• Benefit of portfolio diversification
Since blue-chip fund companies are generally established business organisations, their revenue is not generated from a single channel. As a result, these companies are able to cushion themselves against potential losses, and their investors are able to diversify risk for stable returns.
• High liquidity
By virtue of their performance, blue-chip fund companies enjoy high credit-worthiness in the market. This makes their stocks an attractive option for investors. As a result, stocks of such companies can be purchased and sold easily, offering investors high levels of liquidity.
What are some top blue-chip stock companies in the market today?
Given below is a list of some of the top blue-chip companies in the market today –
- Reliance Industries Ltd.
- Tata Consultancy Services Ltd.
- Hindustan Unilever Ltd.
- Infosys Ltd.
- ICICI Bank Ltd.
- HCL Technologies Ltd.
- Titan Company Ltd.
- Larsen & Toubro Ltd.
- HDFC Bank Ltd.
- Axis Bank Ltd.
- Asian Paints Ltd.
Safety considerations for blue-chip stocks
Though it is true that blue-chip companies are highly resilient against market volatility, it is still important to remember that this may not always be the case. Exception to the rule as they maybe, there have been companies such as General Motors and Lehman Brothers that were declared bankrupt during the Great Recession of 2008. So, it does well to do thorough research before you choose a blue-chip mutual fund.
Factors to consider before investing in blue-chip funds
If you are planning to invest in blue-chip mutual funds, keep the following things in mind to make lucrative investments –
Track record of the fund –
Though the future cannot be predicted down to the last detail, you can still be assured that a fund that has been consistently performing well belongs to a company that handles money wisely.
Expense ratio –
This is the cost you pay to own a blue-chip fund. Keep this in mind before choose a fund because it impacts returns – the higher the returns, the higher will be the expense ratio.
Our investment objective and strategy –
You must ensure that the blue-chip fund you’re investing in meets your investment goals and strategy. Find out the risk level involved, the proportion in which the net assets are invested, and more.
Additional Read: Buying Mutual Funds at Lower NAV vs. Higher NAV
Over to you
Ready to invest in blue-chip funds, but not sure where to begin? Sit back and browse through different blue-chip mutual fund options on Tata Capital’s Moneyfy app. Choose the right fund based on your investment goals, risk tolerance, and other requirements. Earn steady returns and secure your future with Moneyfy today!