What is the difference between Large cap and Blue-chip Funds?

Blue chip and large-cap funds are often mistaken for the same thing, but they differ in many ways. While they share some similarities, they have several distinct characteristics that can impact your investment choices. Understanding how these funds work is essential when planning for your future financial goals. A clear picture of their differences can help you select the right option that aligns with both – your financial objectives and risk expectations. Let’s explore these two investment options and see if one truly stands out in the discussion of blue-chip vs large-cap funds.

What are blue-chip funds?

Blue-chip funds invest in stocks of well-established companies that are considered industry leaders. These companies typically have a strong financial track record and may present low risk. Blue-chip stocks normally belong to the largest publicly listed companies in the country, and are known for their stability and consistent performance.    

What are large-cap funds?

Large-cap funds are open-ended equity funds that invest at least 80% of their assets in large-cap stocks. According to the Securities and Exchange Board of India (SEBI), large-cap companies are those ranked from 1st to 100th based on total market capitalisation.

Note: Market capitalisation is the total market value of a publicly traded company’s equity.

Are blue-chip funds just another name for large-cap funds?

The terms blue-chip and large-cap are often used interchangeably. However, SEBI formally recognises only the large-cap classification.

Large-cap funds are designed to invest at least 80% of their assets in stocks of the top 100 publicly listed companies based on market capitalisation. These companies are well-established, financially stable, and considered industry leaders. Because of these qualities, they are often referred to as blue-chip stocks.

However, SEBI's product categorisation circular, introduced in October 2017 and implemented in June 2018, does not include a separate category for blue-chip funds under the equity fund segment. This does not mean that blue-chip funds have ceased to exist. Instead, SEBI has streamlined classifications only into large, mid, and small-cap to avoid confusion.

So, if you select a fund that invests in the top 100 companies by market capitalisation, it falls under the large-cap mutual fund category, regardless of the name used.

What are the differences between blue-chip and large-cap funds?

Here are some differences between blue-chip and large-cap funds:

1. Suitability

Blue-chip funds invest in companies with a proven track record, which is why they are preferred by risk-averse investors. You can consider investing in these funds if you prioritise stability and steady returns.

Large-cap funds, on the other hand, may be suitable for investors looking for growth along with stability. While they also invest in the top 100 companies by market capitalisation, they may focus more on higher growth potential.

2. Risk

While both fund types are considered low-risk compared to mid- and small-cap funds, blue-chip funds tend to be slightly less risky. This is because they invest in stable and financially sound companies, which are less likely to experience extreme volatility.

Large-cap funds, though still relatively safe, may carry a slightly higher risk as they can include companies that, while large in size, may not have the same financial stability and strength as blue-chip firms.

3. Brand value and recognition

Blue-chip funds invest in stocks of companies that are often household names. These companies are known for their longevity, brand value, and scale of operations. They have built a strong reputation over the years and are widely recognised across industries.

Large-cap funds include companies with a sizeable market capitalisation, but they may or may not enjoy such widespread recognition. Some large-cap firms may be growing businesses that have recently entered the top 100 list but have not yet established the same brand value as blue-chip companies.

When should you invest in blue-chip funds?

Blue-chip funds can be the right fit if stability is what you are looking for. These funds invest in the most established companies within the large-cap segment. These firms have strong financials and may be better equipped to withstand market highs and lows.

They are considered one of the least risky options in the equity segment, which makes them suitable for investors who prefer consistent returns over high growth potential. However, since they are still equity funds, they still carry some risk. The risk is only lower relative to other equity investments.

When should you invest in large-cap funds?

You may consider large-cap funds if you want to invest in well-established companies while still benefiting from growth and stability. These funds invest in well-established companies and can offer lower volatility compared to mid- and small-cap funds. If you want to diversify your portfolio while keeping risk in check, these funds can be a choice.

Note: Both blue-chip and large-cap funds belong to the equity category and are not entirely risk-free. All equity investments are subject to market movements.

Conclusion     

If you are considering large-cap vs blue-chip funds, start by evaluating your risk appetite. Understanding how comfortable you are with market fluctuations can help you choose the right investment. Additionally, you must note that selecting a mutual fund scheme should go beyond just its label. It is equally important to look at factors such as portfolio composition, past performance, fund manager expertise, costs, and investment strategy. Neither a blue-chip fund nor a large-cap fund guarantees returns, and market dynamics can affect them both.

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