What are some of the BIG companies that come to your mind when you talk about the Indian market? Tata Group, Reliance, Birla Group, Adani Group, Mahindra Group etc right?
These are the groups of companies that are massive in terms of their market size and are usually classified as Blue Chip stocks. However, I will give you a better and more precise definition of a Blue Chip stock.
What is a Blue Chip Stock?
Here are the few characteristics of a Blue Chip stock:
- Market Capitalization: Blue Chip stocks have a market capitalization in billions of dollars. 1 billion dollars is equivalent to nearly 7200 crores rupees. For a rough estimate, you can say that a Blue Chip company has a market capitalization of over $5 billion dollars or INR 35,000 crores. For example, Reliance Industries Limited (RIL) had a market capitalization of over $130 billion or INR 10 lakh crores as of December 2019.
- Consistent Dividends: The Blue Chip companies have a great track record of paying dividends to their investors or shareholders. A dividend is basically profit-sharing by a company. For example, Cipla, an Indian Pharmaceutical Blue Chip company paid out a dividend of ₹ 4 per share for the interim year 2020.
- Reputation: Blue Chip companies have a good reputation and often, they are a household name in the country.
- Industry Leader: A Blue Chip company is usually among the top 3-5 performers in its respective industry, especially in terms of revenue growth and profitability.
- Debt: Blue Chip companies are almost debt-free. They have a proven track record of strong balance sheet over several years. For example, the debt to equity ratio for ITC Ltd. is 0. You can check the debt to equity ratio of various companies at screener.in.
Note: Although there are several websites like Moneycontrol, Yahoo Finance, and Trade Brains, I like screener.in to check various ratios and vital statistics for a simple, easy to search and clean interface. MoneyControl has lots of numbers, including the ones not relevant to you.
What are the best performing Blue Chip Stocks?
The NIFTY 50 index is a list of 50 Blue Chip Indian companies from various sectors. As of 2020, there are nearly 120 Blue Chip companies in India.
I have listed some of the best companies by sector which have very good fundamentals. You can invest in these stocks during the bear market or depression and receive good returns in 1-2 years. Of course, you can stay invested for a long time.
- Cipla Ltd.
- Sun Pharmaceutical Industries Ltd.
- Dr. Reddy’s Laboratories Ltd.
- Dr. Lal Pathlabs
- ERIS Lifesciences
- Lupin Ltd.
2. Banking and Finance
- HDFC Bank
- Housing Development Finance Corporation
- Bajaj Finserv Ltd.
- Kotak Mahindra Bank Ltd.
- ICICI Bank Ltd.
3. FMCG or Non-Durable Consumables
- Nestle Ltd.
- ITC Ltd.
- Godrej Consumer Products
4. Consumer Durables
- Asian Paints
- Bosch Ltd
- Titan Ltd.
Understanding Blue Chip Indices: NIFTY and Sensex
NIFTY 50 and NIFTY 100 comprise 50 and 100 Blue Chip companies respectively. Therefore, if you buy these indices, you buy the shares of underlying companies.
However, different companies have different contributions to the NIFTY index.
Check out the Pie Chart I created in Tableau below.
While Asian Paints has a 1.75% contribution to the index value, ICICI Bank has a 6.94% weightage. HDFC Bank, the largest bank of India in terms of revenue, has a weightage of nearly 11% in the NIFTY index.
How to Invest in Blue Chip Stocks?
Here are the 3 best ways to invest in Indian Blue Chip Stocks.
1. Buy Blue Chip Stocks Via a Discount Broker
You can open your Demat account via a discount broker like Upstox or Zerodha. Once you open an account, you can buy selected Blue Chip stocks using ‘DELIVERY or INTRADAY’ options. You can then buy the shares of bluechip stocks listed in NIFTY 50 or NIFTY 100.
2. Invest in an ETF Fund
Exchange-Traded Funds (ETFs) like Reliance NIFTY BeES (now known as Nippon India ETF Nifty BeES) and Goldman Sachs NIFTY BeES are some of the top index funds. Reliance NIFTY BEES has a value of nearly 1/100 of the actual value of NIFTY 50. It closely tracks the NIFTY 50 index.
But why should you invest in an ETF fund?
Several fund managers and experienced traders have tried hard but failed to beat the index. Beating the index means that your portfolio outperforms the NIFTY 50 or SENSEX.
Nippon India Nifty BeES has shown a year-on-year growth rate of 9–12% in the last 3 years (2016–2019). There are also sectorial ETFs like Bank Nifty BeES. For FY 2019–20, Bank Nifty BeES has shown a growth rate of nearly 20%.
Thus, without having to think a lot about your choice of stocks, you can be less stressed about the market outcome by investing in ETFs.
3. Invest in Mutual Fund
You can buy some mutual funds that invest in Blue Chip stocks. Some of the popular mutual funds are Axis Bank Blue Chip Fund and ICICI Prudential Blue Chip. Axis Bank Blue Chip Fund had given me a consistent return of 20%-25% in the FY 2018-19.
You can buy these mutual funds using ET Money app or any other apps that allow you to invest in Mutual Funds.
There are 3 major downsides of investing in mutual funds.
- You have to pay a percentage of your earning to your fund manager for maintaining your portfolio.
- Mutual funds usually have a lock-in period of 12 months or 18 months. If you withdraw the money before this period, you have to pay an exit charge of 1% or whatever charged by your Mutual Fund.
- You don’t get any dividends for the stocks where your money is invested. Many of the Blue Chip companies DO pay dividends on a regular basis. Till 2020, dividends were tax-free in India.
The Indian stock market tanked by nearly 40% amidst the COVID-19 crisis. However, there is an opportunity in every crisis. Several of the companies which were overvalued, like IRCTC, Adani Green and PVR Ltd. have now returned to their fairly true value.
Several good companies have slumped below their intrinsic values like ITC Ltd., Titan, and HDFC Ltd. The share price of ITC Ltd. slumped down to as low as ₹135 from nearly ₹250 in January 2020 and ₹300 March 2019. From my basic fundamental analysis, I can say that ITC Ltd. is undervalued and you can get hold of the share at a share price below ₹150/share, you are likely to see some good returns in a matter of few weeks. Similarly, Asian Paints is an undervalued stock below INR 1500 and HDFC Bank below INR 900. You just need to pick the right stock.
So, investors keep looking for undervalued and fairly priced Blue Chip stocks and invest in them to get higher returns amidst the Coronavirus pandemic.
Disclaimer: This is not an investment suggestion as I am just an amateur investor.