Introduction
A bluechip fund is a mutual fund or an ETF that mainly focuses its investment in blue chip which is nothing but the share of a large financially sound company with a smooth performance record. They are usually highly capitalised industry players with significant market share and usually rich balance sheets and have always had a policy of paying dividends to shareholders.
Blue chip funds are thus investment instruments that seek to offer the investor a secure long term investment vehicle which has a stable rate of return and relatively low risk as compared to other small or speculative shares.
Preface Blue Chip Fund
Blue chip stocks have been named after the poker game where the chips with the highest value are referred to as blue chips. Likewise blue chip companies are regarded as the best and most secure investments in the stock exchange market. These are mostly market leaders in their respective fields boast of high market capitalizations and are known to have been churning out steady revenues and earnings for many years now.
A bluechip fund is therefore an investment tool that gathers funds from a number of investors and then invests in these firstclass companies. Whether actively or passively managed blue chip funds provide diversification through a selection of high quality stocks that give investors an attractive level of diversification while essentially investing in some of the most reliable businesses around the globe. Key characteristics of blue chip funds include
Stability
They invest in companies that have proved to be viable through thick and thin that is during the good and the bad periods in the business cycle.
Dividend Payments
Most blue chip stocks pay dividends regularly which means that investors are assured of fixed income.
Long Term growth potential
Though they’re not necessarily the highest growth investments blue chip companies as it has been seen provide steady capital gains in the long run.
As such blue chip funds are considered to be an attractive investment in terms of massive returns and lower volatility making them an important addition to investors portfolios.
General Features of Blue Chip Companies
A blue chip company usually brings along some attributes that set the firm apart from all the other firms in the stock market. These attributes make them ideal candidates for inclusion in a blue chip fund
Large Market Capitalization
Blue chip companies usually have their market capitalization figure worth in the billions or trillions of dollars. Market capitalization as a method of constructing value includes shares of stocks outstanding multiplied by the current price. This size enables companies to avoid the effects of economic crises more than small firms do.
Established Reputation
Blue chip companies are quite well known and these are some of the biggest companies that one can find in the market they are best known for their reliability. With Global operation strategies these companies usually hold a large market share in their respective industries. Some of the large firms include Apple Microsoft CocaCola and Johnson and Johnson among others.
Strong Financials
Another element that defines the blue chip companies is the financial strength of the industry. Most of them have sound and solid capital structures experienced steady revenues and possess stable earnings. They will generally not be faced with the financial problems that may be characteristic of small firms or ventures that are considered to be high risk firms.
Dividend Payments
A greater percentage of blue chip firms offer shareholders dividends. These payments give another source of income for investors thus making the bluechip funds ideal for those who are in need of income such as retired persons or those looking for steady income.
Resilience
These companies normally operate effectively at all times especially during bad times due to strategic positioning and revenue diversification. For instance organisations in the production and sale of essential commodities such as consumer staples such as Procter & Gamble are able to make sales regardless of the state of the economic cycle.
Why are Blue Chip Funds appealing?
People are attracted to bluechip funds for various reasons most of which touch on the security of investment in bluechip assets. Let’s explore some of the key benefits that make blue chip funds appealing
Diversification
While a blue chip fund invests in a specific company it invests in many stocks from different fields which gives the investor an extra layer of diversification. This reduces the possibility of poor performances from any of the companies or even a specific sector or market.
Steady Returns
It’s for this reason that blue chip stocks may not have the same kind of dramatic growth as the small companies or those with high risks but they will give you a consistent performance in the long run. Hence most investors discover that blue chip funds are less risky and less sensitive to fluctuations more so when making long term investments.
Income Generation
Most blue chip stocks are characterised by a high dividend policy thereby making blue chip funds an ideal investment for income seekers. Dividends complement the total amount of return on investment and provide stable cash income.
Capital Preservation
A priority for the conservative investor or persons particularly those who are in their fifties is capital protection. Blue chip funds are usually less volatile and it is to the investors advantage since they are more likely not to lose such huge amounts of money as in other categories of shares. Therefore they are considered to be relatively free of risk.
Inflation Hedge
Bonds and other fixed income instruments give negative results in case of inflation while blue chip stocks tend to have the capability to pass their increased cost to the consumers. This shows why blue chip funds make a very attractive investment vehicle for those seeking to hedge against inflation in the long run.
Returns of Blue Chip Funds
Blue chip funds in other cases have provided steady and comparatively stable performances within the historical past. Although they may not achieve the high growth rates of tech startups or other smallcap companies their long term track record is impressive for several reasons
Long Term Capital Appreciation
The blue chip companies have higher market values meaning that their stock prices go up in the long run contributing to capital growth. These firms depend on the manipulation of the economy and therefore as the GDP rises blue chip stocks normally rise.
Dividend Reinvestment
One of the ways that investors in blue chip funds have improved returns is through reinvestment of the dividends. Dividend reinvestment can help increase the total return therefore the use of dividends for reinvestment results in higher total and compounding returns.
Lower Volatility
The volatility level of the bluechip funds is relatively lower than the smallcap or the midcap funds. This is due to the fact that most of the companies in the fund are financial giants and are more immune to the volatility of the market. The company should demonstrate steady profit levels even in the recessed periods in the economy.
Another aspect of great importance with regard to blue chip funds is their capability of performing well under difficult economic situations such as recessions or bear markets. As with any other share the companies are bound to go up and down in the market but blue chip firms are typically better placed to deal with the hard times hence minimising the losses with the bluechip fund.
Drawbacks of Investing in Blue Chip
As we have seen earlier blue chip funds are generally regarded as more secure though there is always a downside to everything. Understanding these risks is crucial for any investor
Lower Growth Potential
In addition the blue chip companies are large and established and therefore they are able to grow at a slow rate as compared to the small growing firms. It can restrain the energy gains that are expected in the investment by potential investors seeking high returns in a short time.
Factors that explain DIF score
A few blue chip funds allocate a large proportion of their investment portfolio to particular industries such as technology or consumer goods industries. Even though these sectors remain relatively unshaken they can turn into beaten up sectors or see sector specific declines which may lead to the performance deterioration of the fund.
Market Risk
It must however be pointed out that like any stock fund blue chip funds are associated with market risks. This means that even though the companies that make up the bluechip funds remain sound the value of the fund will be adversely affected by a general shrinkage in the overall stock market.
Interest Rate Risk
Higher interest rates may become the bane of operations for blue chip companies especially those with highly leveraged balance sheets. This may make their profitability decline through rising rates of borrowings which will cause low stock prices and poor fund performance.
This section compares the/source funds with other types of funds. It will be useful for investors to understand how blue chip funds compare to other types of mutual funds or ETFs.
Blue Chip Funds or Growth Funds
Growth funds belong to the group of funds that invest in companies with high growth rates moreover often in companies developing in the sectors that are in their early development stages for example IT or biotechnology. Although such funds can provide a better return than blue chip funds they are relatively more risky and jumpy.
Blue chip funds vs Value funds
Value funds on the other hand aim at identifying stocks that are in the market at cheaper prices than the worth of the companies that are behind the stocks. As blue chip funds target only big and reputed organizations value funds may also incorporate comparatively smaller or comparatively lesser recognized organisations which are inexpensive only till some time.
Blue Chip Funds versus Index Funds
An index fund mirrors the performance of a particular stock market index such as the S&P 500 index. A large number of blue chip funds are lodged in the indices camp but some are open ended. The positive is that active management of the bluechip investment funds presents an opportunity to perform better than the index although they are costly to transact.
Blue chip funds and Dividend funds
Blue chip funds may contain equity funds with the inclusion of stocks that pay out their dividends dividend funds on the other hand emphasise those companies that offer high dividends on yields. Dividend funds may generate more income but they might be more risky since to achieve a high dividend yield they can invest in more risky companies such as smaller firms.
Factors for selecting Blue Chip Funds
Selecting the right blue chip fund involves careful consideration of several factors such as
Fund Management
Think about whether investing is being made in an active or an index fund. Index funds and ETFs invest to mimic an index and mainly have low expense ratios while mutual funds seek to beat the market and they charge relatively higher fees.
Expense Ratio
The expense ratio is the annual cost incurred by the fund in the form of fees which is shown as the figure percentage. Of course lower expense ratios are normally more favourable to longterm investors because the fees charged are likely to reduce gains in the long run.
Performance History
By following the performance history of the fund you will be able to determine if they are in line with your investment objectives. Past performance does not show the next years or the coming five years performance but it provides a picture of how steadily or consistently the fund has been performing.
Dividend Yield
The dividend yield is used as a tool of analysis for funds that are being bought for income purposes. Still a higher yield means that there will be more frequent cash inflows again. The companies within the fund should be checked to see whether they have the capability to sustain let alone increase their dividends.
Sector Exposure
It is important to understand that some blue chip funds may be specific investments in certain areas of the economy such as information technology or health hence exposing the investor to risk in these industries. When evaluating a blue chip fund it should be well diversified across different sectors including technology health care consumer products financials and industries.
Turnover Ratio
The turnover ratio shows how often a fund buys and sells an asset. Such a direction indicates that the company is interested in a long term investment plan. In contrast the high turnover ratio will result in higher trading costs and taxes for investors. Generally the turnover ratios are relatively low in blue chip funds because the funds are invested in long term securities of stable companies.
Size of the Fund
The size of the fund means the amount that is available for investment at any given time. This can affect investment opportunities if one cannot fully fund the projects in part because of the rate of return required for the investment.
The size of the fund determines its capacity to generate liquidity and therefore achieve better performance. Bigger funds have more capital under their administration and most of the time have better market solutions that can offer more liquidity especially to investors who may need to sell or purchase the share. Nevertheless some very big funds may sometimes need help in the manner in which they deploy their capital which in most cases may slow down performance.
Notable Blue Chip Funds
Several recognized blue chip funds have effectively placed their bets and hence money on the right technologies. Some of the most popular include
Vanguard Dividend Growth Fund (VDIGX)
This Federated International mutual fund is an aggressively managed fund that invests in only high quality companies that pay dividends proven by steady increases in earnings. It focuses on finding companies that are expected to increase their dividends in the future. This is attractive for investors with income as well as capital gains.
The low and reasonable fees coupled with Vanguard’s well known management style make it all the more suitable to invest in blue chip funds. Another mutual fund but this one is from Fidelity Investments. Check it out
Fidelity Blue Chip Growth Fund (FBGRX)
This fund is named large cap blue chip tailored growth because this fund is meant to invest in large cap blue chip companies with growth prospects. It is managed and has the objective of investing in stocks of firms with high earnings good operating positions and sound financials. This fund has had superior returns over the benchmark for many years and is therefore highly recommended especially to growth oriented investors.
SPDR Dow Jones Industrial Average ETF
This ETF reflects the movements in the Dow Jones Industrial Average Index which consists of thirty large widely and internationally recognized blue chip companies. It is a rather conservative way of investing in equities and provides access to some of the largest American enterprises including Apple Boeing and IBM. The associated cost with this ETF is relatively low hence the term expense ratio implies that the ETF is cheap to invest in.
Tax Implication for Blue Chip Fund
Taxes should also be remembered in the consideration process when it comes to blue chip funds investment as they are part of the return. As we observed with bluechip mutual funds the tax handling of bluechip funds depends on the type of investment account the kind of bluechip fund and returns obtained through the fund.
Capital Gains Taxes
To be specific when you dispose of shares in the bluechip fund at a profit there will be a capital gains tax on the appreciation. The tax you will pay will depend on how long it took for you to own the investment. If you owned the shares for over one year you would be eligible for the long term capital gains tax rate which is generally lower than the short term one. If the investment is sold for less than a year then you have short term capital gains which are taxed according to your marginal income tax rates which are usually higher.
Dividend Taxes
Most blue chip companies declare dividends and blue chip funds may in most cases pass on these to the unit holders. Dividends received on equity shares are known as qualified dividends which are from S. companies or eligible foreign companies and are taxed at lower long term capital gains tax rates. In contrast non qualified dividend income is considered as part of the ordinary income and it is taxed at the ordinary income tax rate.
Tax Advantaged Accounts
The best way to reduce taxes that affect your blue chip fund investment therefore is to invest in tax sheltered accounts like IRAs or 401(k) s. Here you can either pay taxes only when your investment gains are received or altogether escape paying taxes on your investment income based on the type of account.
For instance while contributions to a regular IRA or a 401(k) are made with pretax dollars and taxes are not paid until users make withdrawals upon retirement in the case of Roth IRAs withdrawals under certain agreed conditions are made tax free.
Conclusion
Blue chip funds are attractive because they provide both growth and relative stability and can also generate income in the current coin. Some of the funds top holdings are blue chip firms which refers to financially robust companies that dominate established markets therefore these funds are ideal for conservatives especially those with a risk averse tendency.
In this respect blue chip funds are less explosive than high risk or smallcap stocks. Still these tools represent one of the most reliable investment instruments for getting regular income on dividends and a permanent stable increase in capital. Blue chip funds are more suitable for long term investment for those who are nearing retirement and those who are in search of a diversified investment portfolio with low risks.