Know All about Blue Chip Companies
Blue chip companies are those big, sound and stable companies that have remarkable stature in the market. Many traders and investors choose to opt for blue chip stocks because of their stability and rising dividends.
Blue chip stocks are often considered a good option for investment due to their dependable returns.
What are Blue Chip Companies?
Blue-chip Company stocks are highly priced market stocks that have emerged as a preferred investment option over recent years. The companies that issue blue-chip stocks are highly esteemed in the stock exchange market and tend to have a stable financial record and credibility.
Besides their repute, the fact such companies extend attractive dividend pay-outs can be credited for the growing popularity of the said stock. However, before investing in blue-chip stocks, individuals should equip themselves with a few essential details.
Stocks that are issued by blue-chip companies, i.e. companies with a large market capitalisation, are termed blue-chip stocks. Companies that issue these shares are well-established and enjoy great market repute; therefore, the shares issued by them are highly valued in the market.
Individuals can invest in Blue-chip stocks in India either directly or through Mutual Funds.
Features of Blue-chip Company Stocks:
The features of Blue-chip stocks are listed below:
- Assured Returns: Blue-chip Company stocks generate returns quarterly in the form of dividends. The fact that companies which are well-established also serve as a safe investment avenue for most investors. With this safety comes the assurance of earning steady but guaranteed returns.
- Credit-worthiness: Blue-chip companies have enough capital to clear their financial dues and obligations easily. This, in turn, makes the shares issued by such companies high in creditworthiness.
- Risk Factor: Since big companies with stable financial performance issue these stocks, the risk factors associated with blue-chip stocks are comparatively less. Investors can further reduce the burden of risk associated with blue-chip shares by diversifying their investment portfolio.
- Investment Horizon: The term of investment is usually over 7 years. Such extended term makes Blue-chip stocks suitable for achieving long-term financial goals owing to their long investment horizon.
- Growth Prospect: Blue-chip companies are those large companies that have reached their maximum growth potential. This influences the Blue-chip shares in India, which undergo slow but steady growth over time.
Reasons to Invest In Blue-Chip Stocks:
Blue-chip Company stocks in India are considered to be a desirable investment option for achieving long-term financial goals. Here are a few reasons to invest in Blue-chip shares –
Offers higher returns that are paid quarterly.Facilitates corpus building.Facilitates portfolio diversification.Cushions the impact of the recession, inflation and economic stagnation.
However, owing to their higher price, blue-chip shares may not be suitable for small investors.
Major Advantages of Investing In Blue-Chip Stocks:
The strong financial standing, excellent market valuation, and creditworthiness of blue-chip stocks act in favour of their investors and extend multiple benefits to them.
Blue-chip stock investors would avail the following advantages –
- Stable and Regular Dividends: Irrespective of the market conditions, blue-chip stock investors avail stable returns on their investments. Such returns are generated in the form of dividends, which are extended to them quarterly.
- Opportunity to Achieve Financial Goals: Being a long-term investment option that comes with an investment horizon of over 7 years. It gives investors ample time to build a healthy corpus over the years for their respective financial goals.
- Advantage of Portfolio Diversification: Blue-stock companies are high-profile business organisations that do not generate revenue from just one channel. It allows them to cushion their losses against operational setbacks and allows their investors to spread out the associated risks of blue-chip company shares.
- Liquidity: Blue-chip companies enjoy market goodwill and high creditworthiness. It directly enhances the market value of blue-chip company stocks and makes them an attractive investment option for investors. This directly facilitates the purchase and sale of such stocks, making them liquid in nature.
Disadvantages of Investing In Blue-Chip Stocks:
Blue-chip stock investors might encounter the following disadvantages –
- Slow Growth Rate: Blue chip stocks generally have a low growth rate. This means that an investor would have to wait patiently to gain the expected returns fast.
- Low Dividend Yields: Since Blue chip stocks have a slow growth rate, they might provide low dividends.
- Comparatively Expensive: Since blue-chip stocks have reliability, low risk and less volatility, they are usually in high demand. This makes them expensive in the market when compared to other stocks of similar size.
Alternative Investment Options:
Owing to their market goodwill and credibility, blue-chip company shares in India come with a low-risk factor. The low-risk burden further makes them suitable for risk-averse and conservative investors.
However, investors who want to earn greater returns with limited exposure to market risks can opt for these alternative investment options –
- Real Estate: Even though the growth of the real estate market in India has slowed down a little, it is still one of the most profitable investment avenues in the country. Investors can purchase, rent or sell residential and commercial properties and generate income in due course.
- Exchange-Traded Funds: ETFs are a collection of securities that are traded on exchanges that are considered as a low-risk investment option. ETFs often consist of stocks, bonds, commodities and other investment instruments and come with a low expense ratio and lower associated charges. As per their requirement, investors can invest in Gold ETFs, Liquid ETFs, International ETDs, or Bank ETFs.
- Fixed Deposits: Investors who want to generate returns and tax benefits on the same can invest in fixed deposit schemes instead of blue-cap stocks. Depending on their requirement, investors can park their money in fixed deposits for both long-term and short-term. FDs also allow investors to avail of a loan against it in case of an emergency.
- Government Bonds: Government bonds are low-risk investment options that are issued by the government of India and monitored by the RBI. Such bonds extend fixed interest to their investors and allow them an opportunity to diversify their investment portfolio. Additionally, government bonds extend tax benefits to investors and offer liquidity.
Blue-chip company stocks in India are an attractive investment option for individuals who want to generate steady returns over a long period. However, investors can always explore other investment avenues and enhance the profitability of their investment portfolios.
Reliance Industries Ltd, Tata Consultancy Services Limited (TCS), State Bank of India, ICICI Bank Limited are some of the Blue Chip Company Stocks.
What Qualifies a Company as a Blue Chip?
Let us understand the characteristics and features that make an organization a blue chip company:
- The Brand is Well established: The business should be well-known and well-established. Let us take two examples here. Nestle a big brand in India makes many products like Maggi, Nescafe, etc. There was a big blow to Nestle a few years ago when the entire stock of Maggi had to be returned because of testing issues. There was a slight variation in the stock value, but Nestle being a big brand, overcame this blow and was back in the market standing strong. On the other hand, let us consider newbies like Facebook or Twitter. They are undoubtedly famous but still don’t come in the category of ‘Blue Chip Companies’.
- Reputation and Credibility: Blue Chip companies are extremely reputed and have products and services that are widely used. They have survived market crises, and several financial controversies, sailing through the volatility smoothly. They have a strong balance sheet and profits grow each year. Let us look at examples like Reliance Industries, Hindustan Lever, or ITC. Their products and services have been in demand for years and the trust of the consumer has never waivered in them.
- Well-Capitalized: A blue chip company normally runs on billions of dollars. 2020 was a testing time for blue chip companies that miserably failed because of poor capitalization. Let us consider examples like Sun TV Network Ltd, or Godrej Agrovet Ltd, who suffered major losses post-pandemic. However, due to years of decline, they were nowhere near capitalized enough to be blue chip companies.
Please note,
The views in the article/blog are personal and that of the author. The idea is to create awareness and for educational purpose and not intended to provide any product recommendations.
