Why are Large caps called bluechips? And should you invest in them?
To state it outright, there isn’t a whole world of upfront difference between what we colloquially know as Largecap Stocks & Bluechip Stocks; these terms may often be used interchangeably. But to the more discerning investor, bluechips could imply a valuable subset of largecaps. Thus, we thought of focusing on the finer nuances of bluechips in this article.
Have you ever wondered why largecaps are called bluechips? Or are they perfect synonyms of each other? Well, read on…
In the Indian financial parlance large cap also known as Big cap is defined by AMFI (Association of Mutual Funds in India) to mean the top 100 companies with the highest market capitalization.
Bluechip on the other hand was a term coined by Oliver Gringold in the year 1923, to refer to highly priced stocks. An observation from the game of poker where blue coloured chips generally carried higher value, the term was quickly adopted to by most when trying to describe stocks that enjoyed high prices.
Overtime, this definition has evolved and today, a bluechip stock may not necessarily be highly priced; it could stand for any firm that is well recognised for its robust reputation and sound financial performance.
So there’s your difference in one line (granted, it’s taken a fair few more to get to it but) the term largecap mainly refers to the valuation of a company, while bluechip refers to its financial, historical and, to an extent, market repute.
Owing to this repute, however, companies referred to as bluechips are gigantic. More often than not, bigger companies have better finances. They can ride out rough patches and make the most of the good times.
Now here’s what we mean in hard, cold numbers. The total market cap and net profit of 3,736 companies listed on BSE for FY22 was Rs 260.7 lakh crore and Rs 10.6 lakh crore respectively. Among these, the top 100 companies accounted for 64% of the market cap and 69% of the net profit!
How do blue chip stocks work?
While this information is good to know, your next thought may be “how does this help me”? Well to quote an old adage ‘aim for the moon, if you miss you may hit a star’, (Yes the adage was most likely coined before we realised the astronomical error) it advises one to attempt for a larger goal than a smaller one; that way even not accomplishing it entirely may still keep you in a position above most others who aimed low. For wealth creation too, this thought rings true, and generating wealth through the market can be aided greatly by investing in those companies that provide robust growth over time and across market conditions a.k.a. bluechips. Not to undermine the potential of Small & Mid caps but investing across bluechips can be a good rule of thumb for new investors to safely & steadily keep growing their money’s worth.
Some additional advantages bluechip stock may offer are:
Safer investment opportunity – for the uninitiated, culling out the deeper insights of the market may take time and as such, it may be safer to put your money on the blue whale rather than the clownfish. In fact, apart from extreme cases bluechip investors are observed to have received stable and regular dividends across market conditions.
Diverse investment pool – while collected under the tag of bluechip, these companies are generally present across sectors & industries. So while diversifying your portfolio, you’re quite likely to find the opportunity to choose blue chips over other stocks in the sector.
Safeguard against stagnation – Bluechip companies can take on competition fearlessly, using their experience and conviction to expand to new territories and survive the depths of an uncertain business environment.
Longevity – Even when the going gets tough, one can count on bluechips to stay in the game. As a recent example,take Vodafone Idea’s survival through the telecom industry’s price war;its large market share and potential loss of healthy competition in its absence enabled it to hold its ground.
If you too are planning to start your investment journey, or are already building wealth, look for these qualities in the stocks you pick. In fact, if you are planning to invest across multiple largecap or bluechip stocks, you may consider opting for a Mutual Fund scheme investing in large cap/bluechip stocks. This will help you go about investing in reputed stocks without the hands-on effort required to manage your portfolio.
Not sure where to begin? Allow us to ‘bluechip’ in
Quant Mutual Fund has recently launched a large cap fund to help investors sail through market cycles. The fund endeavours to invest at least 80% of its corpus in bluechip companies that have a proven track record and are likely to make large contributions to India’s future growth.
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