Blue-chip mutual funds invest in blue-chip companies. Blue-chip companies have registered high growth over time, have excellent balance sheets, and have substantial market capitalization. As a result, blue-chip funds are popular as the companies they invest in demonstrate stability and return visibility.

 

However, that doesn’t mean you should invest in blue chip mutual funds without thought. This article introduces you to a few things to consider when investing in blue-chip companies.

 

The risk-to-reward ratio of blue-chip mutual funds

The risk-to-reward ratio is a vital metric to consider for investing in blue-chip funds. The ratio helps determine the returns you can make proportional to the risk needed. For instance, a risk-to-reward ratio of 1-to-3 means for every ₹1 you invest, you can gain ₹3.

 

High-risk mutual funds have a high-risk factor but can offer higher returns. Therefore, risk and returns are complementary and must be assessed before investing in an asset.

 

As for the risk-to-return ratio of blue-chip mutual funds, the risk is moderate compared to other categories like small-cap, mid-cap, and flexi-cap mutual funds. Blue-chip mutual funds offer stability and lower risk as they invest in companies with a large market cap.

 

Since risk and reward go hand-in-hand, blue-chip mutual funds yield moderate returns. You may earn less investing the same amount in blue-chip funds than in small-cap funds, but the former offers more stability. Your returns do not fluctuate significantly, making blue-chip funds an excellent choice for investors with low and moderate high appetites.

 

Things to check before investing in blue chips

1. Research the AMC’s pedigree

You must research the Asset Management Company’s (AMC) history and pedigree before investing in its blue-chip fund. Many investors may invest in blue chip funds because of the fund’s AUM (Assets Under Management). However, it shouldn’t be the only factor to consider for investing in blue chip funds.

 

Analyse the past investment decisions taken by the AMC to decide whether to invest in an AMC’s fund.

 

2. Fund’s portfolio

You must analyse a blue-chip fund’s portfolio before investing in it. Gauge whether the portfolio suits your risk appetite and can generate the returns you need to meet your financial goals. Avoid investing in blue chip funds that invest in companies with a poor outlook, as it can affect the fund’s returns.

3. Fund’s performance

A blue-chip fund’s performance is usually stable and predictable. However, you must analyse its past performance too before investing. It can help you predict the growth of your investment in the forthcoming years.

4. Your financial goals

Ensure you have an idea of your financial goals. Since blue chip mutual funds invest in equities, your returns may be volatile due to the nature of the asset. Ensure you have a clear sight of your financial goals and when you might need your invested funds.

Advantages of investing in blue chip funds

Investing in blue-chip funds is beneficial because:

  • Stable, reliable growth

A blue-chip investment is less risky than a few other categories of mutual funds. Since blue-chip funds invest in companies with a stable balance sheet, they offer steady, predictable growth.

  • They help achieve long-term financial goals

Blue-chip funds can help investors achieve their long-term financial goals. The companies these funds invest in are stable and provide substantial long-term growth. Therefore, investors can invest in blue-chip funds to achieve their long-term goals, such as buying a house.

  • Liquidity

Blue-chip funds offer liquidity like other mutual funds. They’re always in demand, meaning you can buy and sell your blue-chip mutual fund investment units easily. You can also avail of a loan against the units of blue-chip funds.

Blue-chip mutual funds are an excellent choice for conservative as well as aggressive investors. They help you invest in companies with proven tracking, helping you make consistent returns. However, like with any asset, ensure you know your risk appetite and the different components of blue-chip funds before investing in them.