Blue Chip Funds

A blue-chip mutual fund invests most of the corpus  in blue-chip stocks. These are shares of well-established companies with an excellent track record of performance over time. In this article, we will learn more about blue-chip funds, how they work and much more.

Origin of Blue Chip

Oliver Gingold, an employee at Dow Jones, coined the phrase ‘Blue-Chip’ in the year 1923. This term came into practice after Gingold, while standing near the stock ticker at a brokerage firm, noticed that several stocks traded at $200 or more per share. He called them ‘Blue-Chip Stocks’ and wrote an article on them. That’s how the term ‘blue-chip’ came into existence. Since then the term has been used to refer to highly-priced stocks, but now it is used more commonly to refer to high-quality stocks.  

What are Blue Chip funds?

Blue chip funds are equity mutual funds that invest in stocks of companies with large market capitalisation. These are well-established companies with a track record of performance over some time. However, as per SEBI norms on mutual fund categorisation, you don’t have an official category called Blue Chip funds. Blue Chip is commonly used as a synonym for large cap funds. 

You may notice some mutual fund schemes having Blue Chip in their name and preceded by the word ‘emerging’. These are large and midcap schemes which only have ‘Blue Chip’ as part of their name. It helps if you don’t blindly pick a scheme just because it has Blue Chip in its name. 

According to the SEBI mandate, large-cap funds invest at least 80% of the corpus in shares of the top 100 companies by market capitalisation. It is a similar definition for Blue Chip funds which invest in the top 100 Companies. 

How does it work?

Blue Chip funds help investors benefit from the financial growth of Blue Chip companies. Blue Chip mutual funds invest mostly in stocks of the top 100 firms by market capitalisation. For a little diversification, these funds can invest in bonds and cash equivalents. 

Younger investors can bear the higher risk that comes with investing in these stocks as they have a longer investment horizon. Hence, they can have a more significant portion of their portfolio invested in stocks and equities. You may invest in Blue Chip funds to build your core portfolio. It consists of around 60%-70% of your portfolio and lends stability to it. 

Advantages of investing in Blue Chip Funds

Capital Growth: You may invest in Blue Chip funds to build wealth over some time. It helps you invest in financially sound companies with a track record of performance. You may include Blue Chip funds in your core portfolio for stability against volatile stock markets. 

You may invest in Blue Chip funds to build wealth over some time. It helps you invest in financially sound companies with a track record of performance. You may include Blue Chip funds in your core portfolio for stability against volatile 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 planning. 

Economic Moat: Blue Chip firms are large in size and may enjoy an economic moat. It is a competitive advantage these companies enjoy over rivals and peers. It translates to significant market share and helps you earn inflation-beating returns over time. 

Liquidity: Blue Chip funds are open-ended and you may redeem units very quickly. It helps you exit the investment during times of financial stress. Moreover, you may avail a loan against units of Blue Chip funds. 

Blue Chip Safety Considerations

AMC track record: You must check the track record of the AMC before investing your money. It helps if you opt for Blue Chip funds with large assets under management (AUM). Moreover, these funds can bear the sudden redemption pressure of large investors.

Investment style: You must check the investment style of the fund manager and opt for funds where you are comfortable with the style. For instance, the fund manager may follow the growth style, value style or a blend of both. 

Expense Ratio: You must opt for Blue Chip funds with a lower expense ratio. It is the cost of managing the mutual fund. Moreover, you may earn a little extra from your investment over some time if you choose funds with a lower expense ratio. 

Portfolio of the fund: You must check the portfolio of the Blue Chip fund to get an idea on where it invests your money. Make sure the large cap fund sticks to the investment objectives. Don’t get fooled by the name Blue Chip and study the portfolio as some funds with the name ‘Blue Chip’ are large cap and mid cap funds. 

Performance against benchmark: You can check the performance of the Blue Chip fund over three to five years. Moreover, you must select Blue Chip funds that have outperformed the benchmark and peers over time.  
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