While making an investment in mutual funds, most investors usually seek quality stocks with reliable returns and stable performance. Large-cap and blue-chip funds are two options that provide an opportunity for investors to diversify their portfolio, balance risk, and potentially earn returns on their investments. However, understanding the difference between large-cap and blue-chip funds can be confusing as many asset management companies (AMCs) often advertise their large-cap funds as blue-chip funds.
Here is a detailed insight into the differences between these two investment options and how they help you build a well-diversified portfolio.
Large-cap funds are mutual funds that invest primarily in stocks of large companies with market capitalization of more than Rs 20,000 crore. These companies typically represent established enterprises and have seen long-term success in their respective industries. As per the Securities and Exchange Board of India (SEBI) guidelines, large cap mutual fundsmust invest at least 80% of their total corpus in the top 100 listed companies by market capitalization.
Blue-chip funds are equity mutual funds that focus on investing in companies with strong financials, competitive advantages, and high brand recognition. These funds can also be invested in bonds and cash equivalents for a little diversification.
Are there any differences between these funds?
Blue-chip funds are not an official category approved by SEBI. Instead, they are a term used by some advisors and fund houses to refer to large-cap funds. Typically, blue-chip mutual fund schemes contain stocks from the top 100 listed companies by market capitalization, making them similar to large-cap funds in terms of composition and risk level.
The main difference between large-cap and blue-chip fundsis that to qualify for a large-cap fund, it is important to cross a threshold of market capitalisation. While blue chip stocks are those companies that are market leaders in their business. Since blue chip companies are easily recognised and financially stable and have a huge distribution network in domestic and foreign markets, large-cap funds usually invest in these companies.
What benefits can blue chip and large cap funds add to your portfolio?
With digital platforms and mutual funds investment apps, you can easily create a diversified portfolio with large cap or blue-chip funds and get the following benefits:
By investing in a single fund, you get exposure to several large-cap companies’ stocks, all while enjoying lower management fees than if you held individual stocks. This means that if one stock or sector underperforms, it may not significantly impact on your overall portfolio performance.
Potential for steady growth
Because large, well-established companies back these types of investments, they tend to experience slower but more consistent growth than small- and mid-cap companies. This steady growth can provide stability and predictability when it comes to your returns on investment (ROI).
Regular dividends and bonus shares
Blue chip and large cap funds usually pay regular dividends that can be used for income or reinvested into the fund for potential future gains. Most of them also offer bonus shares from time to time that can further boost your performance over time. These bonuses are typically based on the number of shares you hold in the fund, so if you have larger holdings, you stand to benefit more from these periodic bonuses.
Strong financials and corporate governance
These companies are recognized for their strong financials and corporate governance practices. They have a solid track record of generating revenues and profits over time, which translates to steady returns for investors. They are also known to adhere to strict regulations, ensuring transparency in their operations and safeguarding investors’ interests.
With financial discipline, strong cash flows, and efficient management, they have the capability to handle market fluctuations, unpredictable changes, and external shocks, serving as a safety net for your investment and making them a reliable choice.
While large-cap and blue-chip mutual funds may have similar characteristics, there is no one-size-fits-all with investments. As a responsible investor, you must assess your age, income, financial goals, and risk appetite before investing in these funds.