The working of a blue-chip fund –Explained!

The working of a blue-chip fund –Explained!

The working of a blue-chip fund –Explained!

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Mutual fund investments can be a great way to build long-term wealth, but it’s crucial to invest in the right strategies. While there are different types of mutual funds available, one type that is especially sought after by smart investors is a blue-chip fund. With its potential for low risk and steady returns, most experts consider this investment strategy a critical component of any long-term investment portfolio.

However, to use blue-chip funds wisely in your portfolio and make the most out of this investment opportunity, it’s important to understand how they work. So, let’s take a closer look at blue-chip funds, the strategy involved, and what benefits these funds have to offer.

Understanding blue-chip funds

A blue-chip fund is an equity mutual fund that invests primarily in large-cap companies. In simple terms, the stocks held in these funds tend to be from ‘blue chip’ companies or those that are perceived as having a solid financial track record, stable earnings growth, strong balance sheets, and are considered leaders in their respective industries. While not an officially approved category by the Securities and Exchange Board of India (SEBI), most mutual fund advisors use the term ‘blue-chip’ when referring to large cap mutual funds.

How do blue-chip funds work?

Blue-chip funds work by investing primarily in large-cap stocks that have strong financial fundamentals and consistent earnings growth potential. These funds typically invest in companies from different sectors, such as technology, consumer goods, healthcare, energy, and finance.

The fund managers managing these funds use their knowledge of the stock market to pick the best stocks for their portfolios based on factors such as company size, financial performance, management quality, industry trends, etc. They then use this information to build an optimal mutual fund portfolio that aims to generate higher returns while reducing overall risk for investors.

Most significant features of blue-chip funds

  • Diversified portfolio

When you invest in mutual funds that focus on blue-chip stocks, you get exposure to different large companies, which helps diversify your portfolio and reduce your risk level. Exposure across various sectors and industries further mitigate the impact of market volatility as different sectors tend to perform differently throughout economic cycles.

  • Competitive returns

Since large cap companies tend to pay regular dividends, this adds another layer of return potential on top of capital gains accrued from share price appreciation over time.

  • Low-risk factor

Blue-chip funds offer an opportunity to diversify your mutual fund portfolio and get exposure to the top 100 largest and most successful companies listed on the stock exchange. This diversification has its benefits, as these large companies are often more stable with lower risk factors than mid and small-cap companies. Plus, these investments do not fluctuate dramatically during the most turbulent market conditions.

  • Experienced management with expert corporate governance

Blue-chip stocks often have strong management teams comprising some of the industry’s brightest minds. These experts have extensive experience and knowledge in forecasting market conditions and anticipating potential risks. Their insights and foresight allow them to identify which steps and decisions will lead to the most successful outcomes.

  • Liquidity

Being an open ended equity scheme, you have the flexibility to enter and exit these funds according to your investment strategy.

Wrapping up

Investing in a blue-chip fund can help you diversify your portfolio and align your investments with the top market players. But it’s critical that the right mutual funds investment strategies are used. You can base your investments on metrics like the past performance of funds, expense ratio, performance against a benchmark, how they perform during bullish and bearish market trends, etc. By understanding these elements before investing, you can better identify and select a fund that aligns with your financial goals, risk appetite, and time horizon.  

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