What are blue-chip companies?
The companies with a large market capitalisation (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 capitalisation 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 honour 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 categorise 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 the 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 a 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.
So, 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 of the mutual fund advisors/companies use Blue Chip funds synonymously to 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 top 100 companies sorted by market cap – which would be the bluechip companies.
These funds also have the minimum SIP requirement as Rs 500, (or lesser) which makes it affordable to start building your retirement pot or the corpus for your future generation.
In short, Bluechip funds have consistent returns, they are highly reliable companies (financially), 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.