What is a blue chip fund?

Posted On: 04 February 2025

Investing can feel overwhelming, especially when you're just starting out. One term you may have heard in this context is "blue chip fund." It may sound fancy, but it’s actually a simple and smart way to invest in established companies. Blue chip funds are the informal term for large cap funds and are popular among investors who want the potential for relatively stable long-term growth with reduced volatility. In this article, we’ll take a closer look at what a blue chip fund is, how it works, and why it might be a suitable choice for your investment journey.

Table of contents

What are blue chip funds?
What does blue chip fund mean?
Types of blue chip funds in India
How does a blue chip fund work?
Features of blue chip funds
Advantages of blue chip funds
Taxation on blue chip mutual funds
Who should invest in blue chip funds?
Factors to consider while investing in blue chip funds
How to invest in blue chip mutual funds?

What are blue chip funds?

Large cap funds are a type of equity mutual fund that invest predominantly in the country’s largest companies (listed between 1 and 100 on the stock exchange). These are typically well-established blue chip companies with strong fundamentals, healthy financials and a track record of good performance. Hence, these funds are sometimes called ‘blue chip funds’

What does blue chip fund mean?

A blue chip fund is a mutual fund that focuses on stable, large-cap companies known for their strong performance and ability to withstand market fluctuations.

The term “blue chip” comes from the game of poker, in which the blue chips have the highest value. Similarly, companies included in these funds are highly valued due to their reliability and financial health.

Types of blue chip funds in India

Blue chip funds are essentially large cap funds. Depending upon the scheme category and investment approach, a mutual fund scheme may invest in blue chip stocks in the following ways:

Pure large cap funds: These focus only on large-cap stocks, investing in the top 100 companies based on market capitalisation.
Multi/flexi cap funds: These are equity mutual funds that invest in blue chip stocks as well as mid-cap and small-cap stocks.
Hybrid funds: These invest in both equities and fixed-income securities, offering a balance of growth potential and relative stability.

Each type has its benefits, so the choice depends on your financial goals and risk appetite.

How does a blue chip fund work?

When you invest in a large cap fund that invests in blue chip companies, your money is pooled with the money of other investors. This pool is then used to buy shares of large companies. A professional fund manager decides which companies to invest in and manages the portfolio to optimise return potential.

Blue chip funds aim for relatively steady long-term growth. These funds are less likely to experience wild swings in value because they focus on companies that have a strong financial history of weathering economic downturns and tend to fall less than small and mid cap stocks during volatility (Past performance may or may not be sustained in the future).

Features of blue chip funds

Blue chip funds have several unique features:

Focus on large-cap companies: They mainly invest in the top 100 companies by market capitalisation.
Professional management: Expert fund managers handle investments to achieve the best results.
Lower volatility: Blue chip funds are relatively stable compared to other equity funds.
Potential for relatively stable long-term returns: These funds aim to deliver relatively stable growth over the long term, making them suitable for potential wealth creation.
Diversification: Your investment is spread across various sectors, reducing the impact of poor performance in any one industry.

Advantages of blue chip funds

Investing in blue chip mutual funds has several benefits:

Relative stability: Blue chip companies have a proven track record of success and stability.
Potentially reliable: These funds focus on businesses with consistent performance, ensuring long-term wealth creation.
Lower volatility: Large-cap companies are less affected by market ups and downs.
Potential for payouts: Many blue chip companies provide regular dividends, adding an extra source of income.
Diversified portfolio: Investments are spread across different industries, reducing risk.

Taxation on blue chip mutual funds

Capital gains on all mutual fund investments are subject to taxation. The tax amount depends on how long you hold the investment:

Short-term capital gains (STCG): If you sell your investment within one year, you’ll pay 20% tax on the gains.
Long-term capital gains (LTCG): For investments held longer than one year, gains up to Rs. 1.25 lakh are tax-free. Beyond that, you’ll pay 12.5% tax.

Additionally, dividends from blue chip mutual funds are taxable based on your income slab.

Who should invest in blue chip funds?

Blue chip funds are ideal for:

First-time investors: They offer a relatively stable way to enter the stock market.
Long-term investors: These funds can be suitable for long-term goals like retirement or children’s education.
Investors seeking lower volatility: Those who want to mitigate risk while benefiting from the long-term growth potential of equities.

Factors to consider while investing in blue chip funds

Before you invest in blue chip funds, keep these factors in mind:

Investment goals: Are you saving for the short term or the long term? Blue chip funds are better suited for long-term goals.
Risk appetite: Equity funds carry high risk. Be sure you’re comfortable with market-linked returns.
Expense ratio: This is the fee charged by the fund manager. A lower expense ratio means higher net potential returns.
Tax implications: Understand the tax rules and how they affect your net returns.

How to invest in blue chip mutual funds?

Investing in blue chip mutual funds is simple:

Choose a fund: Research and compare various blue chip funds based on their performance, expense ratio, and fund manager reputation.
Open an investment account: If you don’t already have one, you can open it through a mutual fund house, broker, or online platform.
Start investing: Decide whether to invest as a lump sum or through a systematic investment plan (SIP).
Monitor your investment: Keep track of your fund’s performance and make adjustments as needed.

Conclusion

A blue chip fund can be a suitable option for those looking for relatively steady growth potential with reduced volatility. By focusing on large-cap, stable companies, these funds provide a reliable way to build wealth over the long term. Whether you’re a beginner or a seasoned investor, blue chip mutual funds can be a valuable addition to your portfolio. Start by researching and choosing the right fund that aligns with your goals. Remember, patience and consistency are key when it comes to investments!

FAQs

Are blue chip funds vulnerable to safety concerns?

While blue chip funds are often more stable than funds investing in mid or small cap stocks, they are not risk free. Market fluctuations can still impact their value significantly, especially in the short term, though the impact is usually lower compared to other equity funds.

Is the best blue chip mutual fund safe?

No investment is risk free and past performance may or may not be sustained in the future.

What is the difference between a large-cap fund and a blue chip fund?

The term blue chip fund is often used synonymously with large cap fund. However, the official categorisation is large cap fund. Some asset management companies name their large cap funds ‘Blue Chip Funds’.

How do you know if a company is a blue chip company?

A blue chip company is typically a leader in its industry, has a strong financial history, provides consistent dividends, and is known for its stability and reliability.

Which is better, flexi cap fund or blue chip fund?

Flexi-cap funds invest across market caps (large, mid, and small), offering higher growth potential but with more risk. Blue chip funds focus on large-cap companies, providing relative stability and lower risk. The choice depends on your risk tolerance and investment goals.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.