3 MinsJanuary 15, 2020
You want to invest, but are wondering how to choose between the safety of your funds and returns. But you don’t have to always sacrifice one for the other. Investing in a Blue-chip Fund can give both capital appreciation and stable returns.
What is a Blue-Chip Fund?
A Blue-chip Fund predominantly invests in large companies. The capital market regulator defines large companies as the first 100 companies on a full market capitalisation basis. Hence, a Blue-chip Fund is also referred to as
a ‘Large-cap Fund’. As per regulation, a Large-cap Fund is required to invest a minimum of 80% in equity & equity-related instruments of large-cap stocks.
Stable businesses, greater market share, quality of management, competitive advantage, and the sustainability prospects are some traits of large-cap companies. Besides, these companies have strong balance sheets, a proven track record
and are traded frequently (highly liquid and usually less volatile).
The portfolio of a Large-cap Fund will constitute of stocks of companies having robust business models enjoying a sustainable competitive advantage as compared to their peers. Typically, the fund manager of a Large-cap Fund follows a ‘buy
and hold’ strategy, looking to hold stocks for the long term and keeps the portfolio churning under check.
What is the broader investment objective of a Blue-chip Fund?
The broader investment objective of a Blue-chip Fund is capital appreciation (i.e. outperforming its benchmark index) by investing in a diversified portfolio of equity and equity-related securities of large-cap companies. However,
since mutual fund investments are subject to market risks, don’t go by past performance alone as an indicator for future returns.
How does a Blue-chip Fund rank on safety?
A Blue-chip Fund is considered to be relatively safe among equity-oriented funds in comparison to large & mid-cap funds, focussed equity funds, small-cap funds and sector/thematic funds. A Blue-chip or a Large-cap Fund
tends to withstand market volatility betterin comparison to other equity-oriented mutual funds because it invests in large-cap companies. And as mentioned above, large-cap companies have an inherent competitive advantage.
Due to this, the fund can handle economic shocks better and generate relatively steady returns.
Who should consider investing in a Blue-chip Fund?
Investing in equity and equity-oriented mutual funds is an effective tool for long-term wealth creation. When you invest, it is important to select mutual fund schemes basis your risk profile, investment objective, and the
time horizon needed for realising your financial goal/s.
Ideally, a Blue-chip Fund should be a part of every equity investors’ core holdings. Having said that, if you are an investor looking at growth and stability, along with capital appreciation, then it is the appropriate
investment for you. It can arrest the downside risk better compared to pure small-cap or mid-cap funds, in the event of the equity markets turning turbulent. But remember that your investment time horizon should be at least
5 years. Hence, consider a Blue-chip Fund while planning for your long-term financial goals.
How To Choose The Best Blue-chip Mutual Fund?
To pick the best Blue-chip or Large-cap Fund, evaluate the schemes on parameters such as returns, risk ratios, performance across market phases (i.e. bull and bear phases), expense ratio, fund manager’s experience, and
investment process and systems followed at the mutual fund house, among others.
[Also Read: Everything you need to know about Portfolio Investment Scheme Account ]
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.