What are blue-chip companies?
The blue-chip companies with a large market capitalization (i.e., how much a company is worth.
For example, ABC Corporation has 10 lakhs of outstanding shares the shares held by the shareholders which include retail investors like you and me, institutional investors like large companies, and owners of the companies themselves.
Assume that the price of each share in the market is Rs 1000. Then the market capitalization would be = Price of the share * Number of outstanding shares = 100* 10 lakhs = Rs 10 Cr).
The Market Cap of these companies runs in lakhs of crores and these companies have been in the market since your grandfather had his first tooth.
So, these companies are ancient and have been in the market for a very long time. Most of them are market leaders in their respective sectors and have been showing consistent performance despite the ups and downturns of the volatile market.
Why are these considered safe bets?
These stocks belong to large companies which are established and are financially sound where they have large amounts of cash or their profits fund their growth or they can honor their debt obligations without any nasty case of default or bankruptcy.
They have stable cash flows (Unilever, P&G, ITC, TCS, etc.) as they sell widely accepted, recognized, and high-quality products.
As they have stable earnings, they also provide dividends to their shareholders (dividends are a share of profit that the company has earned in a quarter or in that financial year).
Investors also categorize them as safe havens and rely on them to bounce back faster than the market owing to the experience and stability (less volatile) in stormy and rough market conditions.
Wait, why are dividends important?
Smaller companies borrow from financial institutions and invest their profits earned to fuel their growth. These companies do not have the ability to share the profit pie with their investors until they grow to a sufficient size.
Bluechip companies, on the other hand, provide you with a regular income in the form of a dividend (apart from the price fluctuations – usually upwards in the market).
This becomes important to an investor like you and me because these dividends are our other income or earnings which typically increase with inflation – hence we receive a higher dividend than the previous year to match that standard of living.
They also indicate the stability and resilience of the company to economic downturns (a positive side effect indeed). These stocks and the funds which invest in these stocks are ideal for risk-averse or conservative investor who wants to grow their wealth with minimum exposure to volatility and risk of the market.
As an investor, if you are looking to invest over a longer period (say for your 4-year-old’s education or your 10-year-old daughter’s wedding etc.) – i.e., a time frame greater than 5 or 7 years, bluechip stocks provide you with a safe and stable return.
How do you invest in these stocks?
You can either invest directly by choosing a sector, studying the company, performing your analysis, and adding your stock to your beloved portfolio or you can pay someone to do the above for you as you sit back and relax and see your money grow into a large corpus this is the idea of a Mutual Fund.
Most mutual fund advisors/companies use Blue Chip funds synonymously with large-cap funds.
Some of these funds also contain the name Blue Chip in them – for example, SBI Bluechip fund, ICICI Prudential Bluechip Fund, etc. SEBI mandates that > 80% of the fund’s portfolio should be invested in the top 100 companies sorted by market cap – which would be the blue chip companies.
These funds also have the minimum SIP requirement of Rs 500, (or less) which makes it affordable to start building your retirement pot or the corpus for your future generation.
FAQs
What are blue-chip companies?
The companies with a large market capitalization (i.e., how much a company is worth. For example, ABC Corporation has 10 lakhs of outstanding shares the shares held by the shareholders which include retail investors like you and me, institutional investors like large companies, and owners of the companies themselves.
Why are companies called blue chip?
Companies that have a large market capitalisation are called blue chip companies. These companies are very large and well-recognised companies with a long history of sound financial performance. For example, Unilever, P&G, ITC, TCS, etc.
What are 10 bluechip stocks in India?
10 bluechip stocks in India are State bank of India, Bharti Airtel, Tata consultancy services, Reliance Industries, Coal India, HDFC, ITC, Infosys, ICICI Bank, ONGC, GAIL, and Sun pharma.
Conclusion
In short, Bluechip funds have consistent returns, are highly reliable companies (financially), and have a lower risk (as they are stable and less volatile) partly describing the qualities of a life partner.
These funds also offer diversification into multiple sectors, hence giving you a balanced and low-risk portfolio suitable for your risk appetite.
