What is a Blue chip fund?

Published On: 19-Dec-2021

When it comes to equity markets, investors often use the terms ‘blue chip companies’ or ‘blue chip stocks’. A blue chip company is a well-established, fundamentally and financially strong with a proven track-record of performance. Such companies are considered more resilient to adverse economic events and minor hiccups in the financial performance and are thus considered relatively safe and stable for the investors.

As large-cap companies which are well-established typically have long-term performance track record and financial stability are often termed as blue chip companies, as such companies reflect strong financial strength for the investors. When talking about the blue-chip funds, they can primarily be of large-cap funds or flexi-cap funds (as per the SEBI guidelines on categorising mutual fund schemes).

Such funds find favour amongst the investors looking for reasonable safety within the equity markets. This becomes possible as blue-chip or large-cap companies have grown through the economic cycles, generally accumulating strong financial strength along the growth journey. Such companies are usually among the industry leaders, large conglomerates, etc. As such, these companies may also enjoy a higher confidence and trust value amongst the investors.

Due to the relative stability in the performance of large-cap companies, such funds are more suitable for investors, who would want to have a fair share of equity within their investment portfolio. However, investors should have a long-term investment horizon while investing in any equity funds. It helps them to avoid short-term volatility in the equity markets.

The investors can invest in large-cap funds in lumpsum or through Systematic Investment Plans (SIPs) by submitting the forms physically at any of the Official Points of Acceptance or by investing digitally over the website or mobile app of the fund house. 

Taxation on returns from equity funds

The gains are taxed as Short-Term Capital Gains (STCG) at the time of redemption if the investors have held the investments for less than 12 months. If the assets were held for 12 months or more, the gains are taxed as Long-Term Capital Gains (LTCG). As per the current tax laws, STCG is taxed at 15% (plus surcharge and cess), while LTCG is taxed at 10% (plus applicable surcharge and cess) without any indexation benefit. The taxable gains can be calculated directly by deducting the investment cost from the redemption proceeds. However, the investors can also avail an exemption of Rs. 1 lakh every year for LTCG from equity shares and equity-oriented mutual funds in aggregate.

If the investor has invested under "Payout of income distribution cum Capital Withdrawal," the investors may also receive distributed income from such funds. Such income is taxed at the regular tax rates as applicable and is also subject to 10% TDS (Tax Deduction at Source) if the dividend income from any mutual fund is more than Rs. 5,000.

With the trust of blue-chip stocks, the investors may consider investing in blue chip funds to benefit from the relative stability and wealth-creation potential over the long term.

Note: The tax provisions, as mentioned in the article, are for illustrative purposes only and are updated as per the Union Budget 2021 passed by the Parliament. The tax rates for capital gains will be as per the tax laws applicable on the date of redemption/ sale and not on the date of investment.