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blue chip funds
blue chip funds

What are blue chip funds?

As per SEBI’s categorization of mutual funds, there is no official category for blue chip mutual funds. However, many mutual fund houses and advisors use blue chip funds as a synonym for large cap funds. There are many large cap mutual funds in India with the word blue chip in their name. For example, SBI Bluechip Fund, ICICI Prudential Bluechip Fund, Axis Bluechip fund, etc.

Furthermore, some schemes use the bluechip word in their name, preceding the word emerging. For example, Principal Emerging Bluechip Fund, Mirae Asset Emerging Bluechip Fund, etc. Most importantly, these funds are large and mid cap funds.

Therefore, having the name bluechip doesn’t necessarily mean that those funds invest entirely in bluechip companies.

Blue chip companies are very large companies with good financial stability and a large distribution network. These companies deal with high quality products and services. Blue chip companies have good recognition both in the home country and abroad. These companies are more resilient to economic downturns. Moreover, they may continue to operate and grow, even during adverse market conditions. Hence, the stocks of these companies are less volatile.

SEBI mandates large cap mutual funds to invest at least 80% of their total corpus in large cap companies. Large cap companies are the top 100 companies as per the market capitalization. Therefore, most companies meet the bar of blue chip companies. Hence, one can safely assume large cap funds to be similar to blue chip funds.

One can invest in bluechip funds through SIP route or lump sum route. Out of both, SIP investment is the most popular one. SIP investment is a way of investing small amounts regularly. They can opt for a monthly SIP or quarterly SIP. However, the monthly SIP is the most preferred option. Also, one can use a SIP calculator to calculate SIP return. Scripbox’s SIP calculator estimates potential SIP return from an investment. 

Blue chip funds or large cap funds are pure equity schemes. The gains from these funds are taxable based on their investment holding period. Redemptions within one year of investment are taxable at Short Term Capital Gains Tax (STCG) rate of 15%. While redemptions made after one year attract long term capital gains tax (LTCG). However, gains up to INR 1 lakh per annum do not attract LTCG tax. Gains above INR 1 lakh per annum are subject to LTCG tax of 10%.

How do blue chip funds work?

Bluechip mutual funds and large cap funds are similar funds. Both are open ended equity funds. They invest at least 80% of their assets in large cap companies. Large cap companies are the top 100 companies by market capitalization.

The fund manager strategically selects the large cap stocks that align with the fund‘s investment objective. These funds benefit from the growth of blue chip companies or large cap companies.

Additionally, the fund manager invests the remaining 20% of the total assets across other asset classes and categories. For example, the portfolio manager invests in mid cap stocks or bonds or in cash equivalents.

Though these funds are pure equity funds, they are comparatively less volatile to other equity schemes like mid cap mutual funds, small cap funds, and value mutual funds, etc.

The large companies that the fund invests in protect the portfolio from volatility. Large cap funds or bluechip mutual funds have the ability to generate significant returns in the long term. Therefore, one should have a long term investment horizon for investing in these mutual funds. Individuals looking for short term investments can invest in debt funds.

Benefits and Limitations of investing in blue chip funds

Benefits of bluechip funds

Capital growth

Bluechip equity fund or large cap fund is ideal for an investment horizon of 5 plus years. Since this mutual fund scheme is for the long term, it will help investors accumulate significant corpus during their term of the investment. These funds help in capital appreciation provided the investor stays invested for the long term. If investors are looking for short term investments, then debt funds are more suitable.

Stability

Large cap funds invest in large cap stocks. Large cap stocks are the ones that rank from 1 to 100 according to market capitalization. These large cap companies are established businesses serving high quality goods and services. They have a loyal customer base, established distribution network, and are financially stable. They are more resilient to economic downturns when compared to mid or small cap companies. Hence all this brings stability to the portfolio.

Diversified business

Large cap companies usually have a diversified business portfolio. They do not rely on one source of income. They spread their wings to multiple sectors and industries. Hence these companies have an established brand name. All these increase investor’s confidence in the company giving the stock price more scope to increase further.

Can stand market volatility

During volatile markets, large caps are least affected when compared to mid or small cap companies. This is because markets have more confidence in these businesses than others as they continue to operate despite economic conditions.

Highly liquid

Large cap funds are highly liquid as they invest in large cap companies. Large cap companies trade in the market at high volume. They are well researched and highly followed in the market, making them more liquid. Also, investors have more information about these companies than others.

Disadvantages of bluechip funds

Low growth

Large cap companies are well established companies, and their scope for growth is lower when compared to mid and small cap companies. Small and mid cap companies are emerging to grow into large establishments. Hence their growth is significantly high when compared to large cap companies.

Low volatility

Large cap companies are more resilient to market volatility. Their strong foundations make the stock less volatile compared to mid and small cap companies. While this can be an advantage during an economic downturn, it can be a problem in a bull run. During the bullish phase, the stock prices might not see a lot of growth when compared to mid or small cap companies.

Who should invest?

Large cap mutual funds are open ended equity mutual funds. Hence a long term investment horizon gives significant results. Investors aiming for capital appreciation with long term financial goals like retirement, or child’s education can look at investing in them. These mutual funds invest in large cap companies. Large cap companies are well established businesses. They are more financially stable and more resilient to market volatility than mid and small caps. They can operate even during economic downturns. Hence investors who want equity exposure with a moderate understanding of risk can invest in bluechip funds.

This mutual fund scheme is highly liquid as large cap companies are highly followed in the market. Hence investors seeking easy withdrawals without having to face the problem of liquidity can invest in these funds.

Which bluechip mutual fund scheme is the best?

The fund that best suits investors requirements and needs is considered as the best fund. A fund that is considered good for one may not suit other investors. Therefore, investors are suggested to invest in those funds that suit their financial needs, investment objective and their understanding of risk. However, there are few top funds in this category as shortlisted by Scripbox.

The top performing blue chip mutual funds in India are:

  • Axis Bluechip Fund
  • HDFC Top 100 Fund
  • ICICI Prudential Bluechip Fund
  • ICICI Prudential Bluechip Fund Institutional I
  • Mirae Asset Large Cap Fund 

While investing in mutual funds, one has to consider the following parameters:

  • Fund performance (historical performance): Investors should look at the historical performance of a fund before investing in it. Though past performance doesn’t guarantee future returns, it still acts as a guide on how the fund performed during different market cycles.
  • Portfolio manager: The experience of a portfolio manager has an impact on fund performance. In other words, the decisions made by the fund manager and the strategies adopted by them play a vital role in the fund’s performance. Therefore, it is essential to consider the manager’s experience and expertise while investing in a fund.
  • Expense ratio: The fund house charges a fee for its management. The fee thus charged is known as the expense ratio. It is essential to invest in a fund with a lower expense ratio to be able to generate significant returns.
  • Exit load: Exit load is the fee charged by a fund house for early redemptions. For equity mutual funds, the exit load is around 1% for redemptions done before one year from the date of investing.
  • Other performance indicators such as Sharpe ratio, Treynor ratio, portfolio turnover ratio etc.

Best Blue Chip Funds to Invest

The top performing blue chip mutual funds to invest in India are:

Frequently Asked Questions

How are blue chip funds different from large cap funds?

Both bluechip equity funds and large cap funds are similar funds. Many mutual fund houses and advisors use blue chip funds as a synonym for large cap funds. Bluechip funds and large cap funds invest in large cap companies. As per SEBI’s categorization of mutual funds, there is no official category for blue chip mutual funds. However, both of them are used interchangeably.

Do large cap funds qualify for tax savings? 

No, large cap funds do not qualify for tax saving. However, Equity Linked Saving Scheme (ELSS funds) qualify for tax savings under Section 80C of the Income Tax Act. One can invest in these funds through Scripbox. Scripbox’s income tax calculator will help in calculating the tax liability, which will help in tax filing. If there is any scope of saving tax, then the calculator will help in suggesting funds for the same. One can show the investment at the time of tax filing to claim the tax deduction.

Published on September 14, 2020