25th February 2021
Finance

How are Bluechip Funds Better Than Small-Cap Funds?

Different equity funds invest in stocks of companies with different market capitalization. For those are new to the world of finance and investing, market capitalization is the value of a company that is traded on the stock market, calculated by multiplying the total number of shares by the present share price. Market capitalization can be further understood on the basis of this simple formula stated below. It is commonly referred to as market cap where ‘cap’ stands for capitalization.

Market cap of a company= Current market price of one share * Total number of outstanding shares
Equity funds can be further categorized as large cap, mid cap, small cap, multi cap, ELSS, and hybrid. ELSS is a tax saving scheme that invests in stocks and other equity related instruments. Multi cap stocks invest across stocks of companies with large, medium and small market capitalization. While small and mid cap funds invest in companies with small and medium market capitalization respectively, large cap fund, also referred to as bluechip fund by many, is an open ended mutual fund scheme that aims at generating capital appreciation over the long term by investing in stocks of financially well established companies.

Benefits of investing in bluechip funds

Large cap funds are those open ended mutual funds that majorly invest in stocks of companies that have large market capitalization. These funds predominantly invest in stocks of those companies which are well established. Of the total assets, large cap funds invest a minimum of 80 percent in company stocks and other equity related instruments of large cap companies. Those who wish to seek regular income from their bluechip fund investments can go with the dividend option. In the dividend option, the capital appreciation earned by the scheme is distributed to investors. When you invest in a large cap fund, you indirectly invest in stocks of those companies that have earned the reputation of being financially established through its successful run over the years. The share prices of these companies are sometimes so that a retail investor may not be able to afford to buy even one share. But by investing in bluechip funds, mutual fund investors can own multiple expensive stocks in small percentages. That’s because one single unit of large cap fund is a combination of several stocks and other equity related instruments. Bluechip funds are ideal for wealth creation. Investors can also target their long term goals like building a retirement corpus or buying their dream home or a luxury car they always wanted.

Are bluechip funds better than small cap funds?

Small cap funds invest in stocks of those companies that aren’t well established but hold the potential to become mid cap or large cap companies in near future. Although there is a good chance of earning higher capital gains, these investments are far riskier as compared to bluechip funds. Small cap companies generally depend on investors who invest capital looking at the company’s growth potential. The small cap sector is highly volatile in nature and investors can even lose their investment amount as small cap funds invest in companies that aren’t well established or reputed. On the other hand, a bluechip fund is far better investment choice because there is very little chance of investors losing out on capital gains. Blue chip investments may witness slow growth, but investors receive consistent returns with very less investment risk. This is why bluechip funds are considered to a safer and smarter investment choice are compared to small cap equity schemes.

Mutual fund investments do not guarantee returns. The equity space in mutual funds is highly volatile in nature and hence investors are expected to determine their appetite for risk before investing.