What are blue chip funds?
Blue chip funds are the mutual funds that invest primarily in blue chip stocks. Blue chip stocks are the stocks of large-cap companies that have been in the business for years. The name ‘Blue Chip’ has its origin in the game of poker wherein blue chips have the highest value as compared to the white and red ones.
These companies have an established track record of good performance and a sound reputation. Blue chip mutual funds are composed of stocks that are very well-known and need no introduction. The products or services offered by these companies have a substantial market share and are widely accepted in the market.
One of the main advantages of investing in blue chip funds is that they have strong financials. This includes their revenue, profitability, dividend history, and the degree of leverage. Blue chip funds are also less volatile as compared to the mid-cap and small-cap funds.
How do blue chip funds work?
In order to derive maximum benefits out of a blue chip fund, it is very important to understand how it works:
A blue chip investment is ideal for realizing long-term financial goals such as higher education, children’s wedding, or retirement planning. This is because the fund invests in stocks of financially strong companies, which have the ability to make profits even in the most adverse conditions.
By investing in well-performing stocks, the blue chip fund gives investors an advantage of gaining from the growth of these companies. Though the major portfolio consists of blue chip stocks, these can also invest in other avenues such as bonds, mid-cap, small-caps, or cash, for the purpose of diversification.
The broad market mainly consists of the blue chip stocks, hence the blue chip funds move pretty much in the same direction as the benchmark index.
Important features of blue chip funds
- With the major investment exposed to the blue chip stocks, the blue chip fund has the power to navigate through the volatile times in the market. The stocks belong to companies with strong business operations and they have the knowledge of how to hedge against the various kinds of risks. Thus, it can be easily said that blue chip funds are safe in the long-run and offer immense stability.
- Such funds have a strong list of companies in the portfolio. These companies have a proven track record of profitability and sustainable cash flows. These companies have performed well in the past and as a result, their stocks have shown commendable price growth over the past five-ten years. Therefore, investing in blue chip funds gives an opportunity for investors to witness growth in their money.
- The blue chip stocks ensure that your money is in safe hands and helmed by a strong management. The management of these established blue chip companies ensures strong corporate governance. Therefore, as an investor, you can be assured of fair practices in the companies. This also protects the company from earning a bad reputation and being caught in any illegal activities because these can have a direct impact on the stocks.
- Blue chip funds ensure wealth creation over the long-term. The companies in the portfolio have a good history of dividend payment. This ensures the strong performance of the companies and cash balance in their hands.
These funds have exposure to other assets such as mid-cap or small-cap funds and bonds. This makes the portfolio well-diversified and makes it well placed to manage even the slightest of the risks.