Blue Chip Fund: Meaning, Advantage, Process, & How to Invest | India Infoline (IIFL) (2024)

We often get to hear the word Blue Chip stocks and blue chip funds quite often in the context of the stock markets. Normally, a blue chip stock is not about high returns but pedigree and performance over the years. These are stocks with stable business models and established brand names. In the Indian context, names like Tata Group, HDFC Bank, SBI, Reliance, Hindustan Unilever etc will all classify as blue chips. A fund that invests in such blue chip stocks is called a blue chip fund.

Why Are Investors Interested In Blue Chips?

There are several reasons for the investors to be interested in such blue chip stocks. Here are a few popular reasons why investors prefer such blue chip stocks.

• Most blue chips have established brand names and that ensures much better standards corporate governance and also commitment to the business.
• Blue chips may not be high return generators like the mid-caps and small caps but they are lower on the risk scale compared to mid-caps and small caps.
• It logically follows that these blue chips tend to help diversify the portfolio and reduce the risk in the portfolio by introducing stability.
• Blue chips have typically proven track records like most Tata Companies have been around for over 100 years.
• Most of the blue chips have a stable dividend payment policy which makes them more predictable in terms of shareholder return expectations.
• Blue chips are extremely liquid in the market and hence these blue chips can be bought and sold in large quantities which makes MFs and FIIs interested in them.
• Since most of these blue chips are closely tracked by the analysts and fund managers, there is a greater sense of purpose and performance in them.
• Most of the blue chips are also available in so it is also possible to hedge these positions using futures or options to reduce equity risk.

Now, What Exactly Is A Blue Chip Fund?

A blue-chip fund is an equity scheme which offers its investors a portfolio of stocks that offer solid and stable financial performance. Such funds may not make as much money in a bull market but also don’t lose too much in a bear market. Hence they are useful in an emergency, they bolster the portfolio quality and reduce risk overall. The shares of a blue-chip fund are in companies that have generated solid and stable yields for their investors for a long period of time. The risk factor with such funds is low.

However, it must be understood that blue chips are typically high market companies. That would logically also mean that due to the high demand, such blue chips tend to be expensively valued in terms of PE ratios. The years of profitability of blue-chip funds make them a sound investment scheme, which is why a lot of investors wish to get them in their portfolio. A blue chip typically focuses on these type of companies.

The stocks in a blue-chip funds deliver high profits and improve an investor’s portfolio quality overall. Popular brands with excellent sales and yields fall under the blue-chip fund. They offer reliability and safety to the investors. A Blue-chip mutual fund is also known as a growth fund.

Advantages Of Investing In Blue Chip Funds

One of the big advantages of a blue chip fund, as the name suggests, is consistency in profits is a factor. Ultimately, that is what every investor wants from their funds. It is important as profits stabilise their finances. Blue-chip funds are investments that strengthen an investor’s financial stability by delivering returns that are slightly more than the market index, which is also called alpha. However, that matters is that the risk is lower and stability is higher in such blue chip funds.

One of the most important factors why people invest is to increase their financial corpus. Blue-chip funds do precisely that for their investors. They offer profits on investments and help a person enhance their capital. In fact, most of the blue chip stocks are high dividend and consistent dividend paying stocks and that works in favour of the fund holding these stocks. That is the big advantage that blue chip funds bring to the table.

Types Of Blue Chip Funds In India

In India, blue chip funds fall into two broad categories

• Large Cap funds
• Index funds

The reasons are obvious. A large cap fund would typically invest in the top 100 companies on the NSE / BSE. This saves them from the risk of small and mid-sized companies. However, many of these large cap companies offer lower returns but are also lower on risk. A large cap fund is basically a diversifier of risk and creates a portfolio that optimizes returns for a given level of risk. Large cap funds need to create alpha by beating the Nifty by a large enough margin to justify the higher Total expense ratio (TER) in active large cap funds.

An index fund, as the name suggests, is a passive fund that does not try to beat the market, but tries to earn as much as the index does. So if the Nifty earned 23.8% returns in 2021, then the index fund would give you similar returns because they create a portfolio that is exactly the same as the index and even the weights are similar to the index. Hence the only concern for an index fund manager is to minimize tracking error. Index funds have the advantage of being lower on the cost scale, compared to active funds.

Blue chip funds would fit perfectly into your long term life goals like child’s education, your own retirement corpus etc. Financing such goals can be best done with the help of blue-chip funds. The returns are attractive, the risk is relatively lower and the compounding is consistent over time.

What Are Some Of The Top Performing Large Cap Funds In India?

Here is a quick look at some of the top performing large cap funds in India. We have considered returns over a five year period so have only considered funds that have been in existence for more than 5 years as a shorter time period will not give a proper picture of such funds. We have considered Direct Plans for simplicity.

Data Source: AMFI

The large cap fund category manages nearly Rs.225,000 crore of AUM and has traditionally been one of the largest and most popular fund categories in India. As you can see, 5 year returns are attractive, although relatively lower compared to mid-caps and small-caps.

What Are Some Of The Top Performing Index Funds In India?

Here is a quick look at some of the top performing Index funds in India. We have considered returns over a five year period so have only considered funds that have been in existence for more than 5 years as a shorter time period will not give a proper picture of such funds. We have considered just the top 10 by returns and chosen Direct Plans for simplicity.

Data Source: AMFI

The index fund category consisting of all kinds of index funds manages nearly Rs.417,000 crore passively, however, pure Nifty and Sensex funds will be much smaller. You would find that the disparity in returns on the Nifty and Sensex is pretty low over a 5 year period with most of the top funds earning around similar returns due to similarities in their portfolio mix and their portfolio weights. Index funds have emerged as a classic example of blue chip funds in India.