A comprehensive guide to understanding blue chip stocks

Experts often suggest blue chip investment options. But for beginners, the name blue chip may be slightly confusing. After reading this article, you will get clarity on what are blue chip stocks and why you may want to invest in them.  

If stock markets are the oceans of wealth, blue chip stocks are the blue whales of the ocean. Blue whales, according to National Geographic, can be as massive as 100-foot-long creatures that weigh more than 200 tonnes. But what blue chip stock means in simple language according to the AMFI classification is any stock among the top 100 companies listed on bourses are large-caps or blue chips. 

What are the traits of large-cap or blue-chip stocks?

1. Large scale operations
2. Massive market capitalisation
3. Stable businesses 
4. Strong balance sheet
5. Long history of existence
6. Experienced and diverse management 

After reading about their traits, do you think investing in blue chip stocks might be less risky as compared to investing in lesser-known companies run by less diverse boards? Navigating through the universe of large-caps will help you understand their texture more accurately. 

List of blue chips stocks listed in India

Data as on 11^th December 2023

(Source: ACE Equity)

Two indices — BSE 100 and Nifty 100 — best capture the movement of India’s largest 100 companies. The Indian large cap space is dominated by financials and IT which together accounted for 44.4% of Nifty 100 as of 30^th November 2023. (Source: NSE)

India’s blue chip club isn’t homogeneous. Companies such as HDFC Bank, Reliance Industries, ICICI Bank, TCS and Infosys are some of the largest of the large companies listed in India in terms of market cap as well as annual profits. Moreover, it’s noteworthy that only 3 out of 100 companies reported losses in the financial year of 2022-23. 

How has the historical performance of blue chip stocks been?

Nifty 100 was launched in December 2005 with a base date of January 2003 and a base value of 1,000. In December 2023, the index traded above 21,000. In other words, the index has multiplied investors’ wealth 21 times over the last 21 years—which translates to a CAGR return of approximately 16%. 

All these factors suggest that if you want to invest in Indian equities, it’s imperative to invest in blue chips. Their weightage in your portfolio may vary depending on your risk appetite and time horizon. The ideal time horizon for investing in blue chips is 3 years or more. Large-caps are suitable for investors with a high-risk appetite. 

Advantages of investing in blue chip stocks

1. Nifty 100 stocks account for 69% of the free-float market cap of stocks listed on NSE
2. Large cap companies help you create a solid foundation for your equity portfolio
3. Large cap companies have strong financial muscle to withstand adversity
4. Strong business fundamentals equip blue chips to tackle fierce competition
5. Blue chip stocks are highly liquid and can be converted into cash quickly

How do I invest in blue chips?

You can buy shares of blue chip companies and hold them in your Demat account. If you still don’t have a Demat account, you may think of opening one with Ventura Securities. 

Just in case you don’t want to invest in blue chip stocks directly, you may think of adding a blue chip mutual fund scheme to your portfolio. A flexi-cap fund or a multi-cap fund also has a significant large-cap exposure. 

In brief

Like blue whales, blue chip stocks can surprise you with their size, competitiveness and financial might. If you want to invest in equity markets, you must hold at least some blue chip stocks in your portfolio. For mutual fund investors, a large cap fund can be a good alternative to buying blue chip stocks directly. 

Do you invest in blue chips? If yes, which stock do you own? How much do they account for in your portfolio? Do share your response in the comments.

Disclaimer:
The blog is for information purposes only and anything mentioned herein shouldn’t be construed as a fundamental reason to buy/hold/sell any stock. Furthermore, the information provided in the blog and observations made therefrom shouldn’t be treated as the extension of recommendations made on the other properties of Ventura Securities. If you follow any research recommendations made by our fundamental or technical experts, you should also read associated risk factors and disclaimers.
We strongly suggest you consult your financial advisor before making any decision pertaining to your finances. Asset allocation becomes extremely relevant.
We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to the blog article hereby solemnly declare & disclose that:
 We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in the securities of the company. We do not have any directorships or other material relationships with the company.
We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.