Blue chip is a poker-related term; this chip is the most expensive in this game. The term is also commonly used in the stock market to classify different funds.
Companies that are financially sound and established with several years of profitable operations are known as blue-chip stocks. Generally, the market capitalization of such companies is in millions and often these organizations are industry leaders. Most of the blue-chip companies are household names and require no introduction. They deliver products and services that are highly demanded in the market.
What are blue-chip funds?
Blue chip mutual funds invest the corpus in blue-chip companies listed on the stock exchange. The investee companies have a long and credible track record with steady and regular dividend payouts and profitable history.
In poker, the blue chips are the most expensive. Similarly, blue-chip organizations have the best track record and are known to remain profitable even in economic downturns or adverse markets.
The working of blue-chip funds
Before discussing who must invest in such funds, understanding how these equity funds work will be beneficial.
Blue chip companies are able to withstand difficulties in a more efficient way when compared to other smaller organizations. These companies are able to operate profitably or better than average market performance even in adverse markets. In simple terms, these funds are known for making reliable investment decisions.
You may invest in these types of funds to achieve the stability of your investment portfolio. The share prices of blue-chip companies often duplicate the broader market performance and move within the same range. An important reason for this is most of the stock exchanges include blue-chip companies.
These types of funds offered by mutual fund houses have a certain specific objective. This is to provide investors like you the opportunity to earn returns through the financial growth achieved by blue-chip companies.
Most of the blue-chip funds invest in large companies but some may invest in other stocks too. To achieve diversification, the funds may invest in mid-cap stocks or in bonds or cash-related instruments. The investment guidelines may vary from one fund to another and it is recommended you check the product brochure or the website to procure detailed information.
Features of blue-chip funds
Blue chip investments are excellent to achieve steady growth of your investment portfolio. Here are four features of such investments:
- Compared to other types of mutual fund schemes, these plans are more reliable to withstand market volatility
- These funds provide a regular and steady income through dividend payouts
- The investee companies have expert corporate governance using the expertise of experienced management teams
- These investments are capable of providing sustainable and superior cash flows based on their past performance records
Who should invest in blue-chip funds?
In comparison to other types of mutual fund schemes, these plans are slightly more expensive. It is important that you clearly understand the working of these funds before making your investment decision. It is recommended you include such types of mutual funds within your overall portfolio but also add other holdings for diversification. If you include only blue-chip funds in the portfolio, you may enjoy stable earnings but the returns would not be high.
You may invest in mid-cap or small-cap funds to build wealth over the years. In case these investments face volatility, the effects are rebalanced through your blue-chip holdings to stabilize the performance of their portfolio. If you are willing to assume high or medium risk, consider investing in sector-specific funds to achieve diversification.
Investing in these types of funds should be for the long-term. Therefore, these are recommended if you have long-term objectives, such as your children’s education, their wedding, or to build your retirement corpus.
“Mutual Fund investments are subject to market risks, read all scheme related documents carefully.”