How Good Are The Blue Chip Funds?

In mutual fund investments, one term that resonates strongly with investors looking for stability, growth and reliability is ‘blue chip funds’. These funds have marked a niche for themselves, attracting a wide variety of investors looking for long-term wealth creation with moderate risk. But before we move forward, let’s understand how the term blue chip funds came into existence. 

Origin of Blue Chip Funds
The term ‘blue chip’ originated in 1923, coined by Oliver Gingold, an employee at Dow Jones. Gingold noticed stocks trading at USD 200 or more per share while observing the stock ticker at a brokerage firm. He referred to these stocks as “blue chip stocks” and wrote articles about them, leading to the term’s widespread use. Initially denoting high-priced stocks, blue chip now commonly refers to stocks of high market capitalisation and better quality. 

Blue chip funds are equity mutual funds that specialise in investing in stocks of companies with substantial market capitalisation, representing stalwart entities with a proven track record of consistent performance. While there’s no official category by the Securities and Exchange Board of India (SEBI) dedicated to blue chip funds, they are commonly associated with Large-Cap funds, reflecting their focus on established players in the market. 

It is worth noting that some mutual fund schemes incorporate blue chip in their names, often accompanied by ‘emerging’. These schemes typically blend large-cap and Mid-Cap strategies. SEBI’s guidelines mandate that large-cap funds allocate a significant portion, at least 80 per cent, of their corpus to shares of the top 100 companies based on market capitalisation. This aligns closely with the investment strategy of blue chip funds, which also target the top 100 companies to build their portfolio. 

Working of Blue Chip Funds
Blue chip funds offer investors an option to harness the financial growth potential of large-cap companies. These funds predominantly invest in stocks of the top 100 firms by market capitalisation, with potential diversification into bonds and cash equivalents for risk management and portfolio optimisation. For younger investors with a longer investment horizon, blue chip funds can be a strategic choice for their core part of the portfolio, despite the inherently higher risk associated with the stocks. Allocating a significant portion, typically 60-70 per cent, of one’s portfolio to blue chip funds can provide stability and growth potential over time, forming the core of a well-rounded investment portfolio. 

Key Features and Advantages
Although not officially recognised as a separate category by SEBI, blue chip funds are commonly referred to by asset management companies (AMCs) as large-cap funds. These funds are tailored for conservative investors with a five to seven-year horizon, aiming to shield them from market volatility. Examples include Axis Blue Chip Fund, ICICI Prudential Blue Chip Fund and SBI Blue Chip Fund. When choosing, focus on features beyond the name alone to ensure a suitable large-cap fund for your needs. 

The key features of blue chip funds are:
1. Steady Portfolio Growth — These funds typically deliver steady growth over time.
2. Market Volatility Resilience — They have the ability to withstand market ups and downs better than other funds that invest in thematic or sectoral or broader-based funds. 

The advantages of investing in blue chip funds include:
1. Capital Growth — Invest in blue chip funds for longterm wealth building with financially sound companies.
2. Stability in Volatile Markets — Include them in your core portfolio for stability so that you can have sound sleep even during market fluctuations.
3. Long-Term Financial Goals — Use blue chip funds to achieve objectives like buying a house or planning for retirement.
4. Economic Moat — Blue chip companies enjoy competitive advantages, leading to market dominance and potential inflation-beating returns.
5. Liquidity — These funds offer easy redemption and the option to avail loans against your investments during financial challenges. 

Top 10 best-performing blue chip funds based on 3 years returns 

Analysing the Top Three Performers
Among the top three best-performing large-cap funds, namely, Nippon India Large-Cap Fund, HDFC Top 100 Fund and ICICI Prudential Blue Chip Fund, each has its strengths and considerations. The Nippon India Large-Cap Fund has shown robust performance across all timeframes. With assets under management (AUM) of ₹24,378.39 crore, it has delivered impressive returns of 45 per cent in the last year, 27 per cent over the past three years, and 19 per cent over five years. This fund’s consistent growth indicates a strong portfolio management strategy and market understanding. On the other hand, the HDFC Top 100 Fund manages a higher AUM of ₹32,355.19 crore. 

While its one-year return of 38 per cent is slightly lower than Nippon India, it has maintained competitive returns over three and five years at 23 per cent and 16 per cent, respectively. This fund’s larger size may provide stability but could also slightly limit its agility in certain market conditions. The ICICI Prudential Blue Chip Fund stands out with the highest AUM of ₹53,505.33 crore, indicating a strong investor base and market confidence. Its one-year return of 42 per cent is notable, and its three-year and five-year returns of 23 per cent and 19 per cent align well with industry standards. This fund’s size and track record suggest a well-established presence in the large-cap segment. 

Considerations before Investing
Now that we understand what blue chip funds are, let’s delve into key factors to ponder before investing in these topperforming funds. Before proceeding, it’s essential to grasp the pivotal factors that influence fund selection and investment strategies.
1. Fund Size Evaluation — Larger funds may often lead to better risk-adjusted return of your investment. However, bear in mind the heightened risk associated with larger investments, particularly during market downturns.Assess your comfort level regarding potential losses before committing your funds.
2. Expense Ratio Assessment — The expense ratio, an integral part of your overall ownership cost, reflects the efficiency of fund management. High expense ratios may indicate overpayment to managers, affecting long-term performance. Conversely, low expense ratios typically signify sound management practices, though they do not guarantee superior investor returns. 

Is Investing in Blue Chip Funds Worth It?
Blue chip mutual funds are often seen as resilient during economic downturns, but their performance isn’t always guaranteed. It’s crucial to assess if these funds align with your risk tolerance and their historical performance during challenging economic periods. Here are some factors to ponder if blue chip funds suit your investment strategy:
1. They may suit you if you prioritise stability and prefer investing in large, financially robust companies.
2. If you aim for long-term financial goals like funding a child’s education or planning for retirement, blue chip funds can be an attractive option.
3. These funds typically offer low-risk investment options with steady returns, making them suitable for investors seeking stability over high returns.
4. However, if you are looking for substantial returns and are willing to take higher risks, other funds like mid-cap or Small-Cap funds might be more suitable. 

Should you Invest in Blue Chip Funds?
Blue chip funds are ideal for investors seeking long-term gains with lower risks. Here are some factors to consider before investing in blue chip funds:
1. Blue chip funds can be an excellent choice if you have a low-risk profile and prefer conservative investments.
2. Beginners on their investment journey may find blue chip funds easier to understand. They are less complex to figure out than smaller-sized companies-based funds.
3. These funds are beneficial for saving towards long-term goals like retirement due to their portfolio stability and potential for growth. 

Conclusion
While blue chip funds offer strong investment potential, it’s crucial to fully understand the value of the specific fund you are considering before committing your investment. A prudent strategy involves diversifying your portfolio across various instruments instead of relying solely on one investment type. Your risk tolerance plays a crucial role in shaping your portfolio, so consider exploring investments across different sectors or capitalisations to balance your risk exposure. A diversified portfolio may offer a more stable return compared to relying solely on a blue chip fund, allowing you to generate wealth through a mix of small-cap, mid-cap and other funds. This approach can help you navigate market fluctuations and optimise your earnings by periodically rebalancing your portfolio.