What are Blue Chip Funds – Blue Chip Funds Meaning, Process & Advantages
Blue-chip funds are the first choice for investors
Any newbie investing in an equity mutual fund would like to play it safe for the first time. Hence, they invest in an equity fund that further invests in shares of companies that are leaders in their respective sectors. Such companies are known as blue-chip companies, and the equity funds that invest in the shares of these companies are known as blue-chip funds. This article we will understand blue chip fund meaning, process & advantages.
What are blue-chip companies?
The market regulator SEBI has defined large, mid, and small-cap companies based on their market capitalisation as follows:
- Large-cap companies: The first 100 companies by market capitalisation
- Mid-cap companies: The 101st to 250th companies by market capitalisation
- Small-cap companies: The 251st company onwards by market capitalisation
SEBI has not given any specific definition of blue-chip companies. But, market participants usually refer to large-cap companies as blue-chip companies. So, the top 100 companies by market capitalisation may be referred to as blue-chips.
What are blue chip funds?
Just like blue-chip companies, SEBI has not given any specific definition for blue-chip funds. But, market participants usually refer to large-cap funds as bluechip mutual funds. So, we can understand the definition of blue chip funds from the perspective of a large-cap fund.
A large-cap fund is an open-ended equity fund that invests a minimum of 80% of its total assets in equity and equity-related instruments of large-cap companies. A blue-chip fund also invests a majority of its money in the equity shares of blue-chip companies. Now that we understand bluechip fund meaning let us look at how it works.
How does a blue chip fund work?
The top 100 companies by market capitalisation are a part of the Nifty 100 Index. So, most blue-chip funds have the Nifty 100 Index as the benchmark. The blue-chip fund manager collects money from investors and invests it on their behalf. The investors are allotted units in proportion to their investment. The net asset value of the blue-chip scheme moves up and down based on the movement in the value of the securities in the portfolio.
What are the advantages of blue-chip funds?
Some of the advantages of blue-chip funds include:
Opportunity to invest in market leaders: A blue-chip fund invests in blue-chip companies. These companies are the leaders in their respective categories. They have a large scale of operations, a good track record of profitability, and can withstand competition. These companies have created wealth for their shareholders by declaring regular dividends and long-term share price appreciation. As an investor in a blue-chip fund, you benefit from all the above.
Blue chip funds perform well across market cycles: Blue-chip funds tend to do better than other equity funds when markets are doing well. During a market crash, blue-chip funds are usually the last to fall, and the fall is lower than other equity funds. Similarly, when the market is recovering, blue-chip funds are the first to bounce back.
Loan against mutual fund units: If you are looking for a loan against mutual fund units, the financial institution will more likely give you a loan against a blue-chip fund than other equity funds.
- Tool to create wealth: Blue chip funds are an excellent investment product to fulfil your financial goals, such as building a fund for a child’s higher education or your own retirement. These funds are also good for wealth creation in the long run.
Best blue-chip funds
Let us look at the returns of some blue-chip funds.
|Scheme name||AUM (Rs. crores)||1-year||3-years||5-years|
|Axis Bluechip Fund||34,583||22.71%||22.94%||22.02%|
|Canara Robeco Bluechip Equity Fund||5,690||26.04%||24.29%||20.73%|
|Kotak Bluechip Fund||3,651||28.38%||22.35%||17.96%|
|ICICI Prudential Bluechip Fund||30,898||28.91%||19.53%||17.31%|
|SBI Blue Chip Fund||31,773||25.82%||20.29%||16.44%|
Note: The returns are as of 11th Jan 2022. The returns are for direct plans with growth option. The one-year returns are absolute. The three and five-year returns are CAGR. The funds have been ranked based on five-year performance.
Taxation of bluechip funds
The taxation of bluechip funds is similar to that of other equity mutual funds.
Short-term capital gain (STCG) tax: If you sell your bluechip mutual fund units before 12 months, the capital gain will be classified as short-term capital gain (STCG). The STCG will be taxed at 15%.
- Long-term capital gain (LTCG) tax: If you sell your bluechip mutual fund units after 12 months, the capital gain will be classified as long-term capital gain (LTCG). The LTCG of up to Rs. 1 lakh in a financial year will be exempt. The incremental LTCG above Rs. 1 lakh in a financial year will be taxed at 10% without indexation benefit.