What Is a Blue Chip Company?

The phrase comes from poker, where blue chips traditionally had the highest value. It began to be used on the US stock market about a century ago for shares of the most valuable, high-quality companies, and spread worldwide from there.

• Large size and market value.
• A long history of operating through good and bad times.
• Strong brand and market position.
• Steady profits and a sound balance sheet.
• Often a record of paying dividends.

There is no official list; it is a market description.

Under SEBI rules, the 100 largest listed companies by market value are classified as large caps. Most companies people call blue chips are in this group, though not every large cap is necessarily considered blue chip, and size alone does not prove quality.

Our page on market capitalisation explains how companies are ranked by size.

The Nifty 50 and Sensex track some of the largest and most actively traded companies in India. Many of their members are commonly described as blue chips. An index fund on these indices gives you exposure to all of them together.

Our pages on Nifty and Sensex and investing in the Nifty 50 explain how.

Large established companies tend to be more stable than small ones. They usually have more resources to survive downturns, easier access to funding and well-known brands. Their shares are also widely traded, so they are easy to buy and sell.

"Blue chip" does not mean safe in every sense. Share prices of large companies can fall sharply in market crashes or when their business faces trouble. Over the decades, some companies once considered blue chips have lost their position as industries changed. Treat the label as a starting point, not a promise about the future.

Look at the list of top Indian companies from twenty or thirty years ago and compare it with today. Several names have dropped out and new sectors have risen. Indices replace companies regularly. This is one reason diversified funds and index funds help: they adjust as leaders change.

A great company can be a poor investment if you pay too high a price for its shares. Popular large companies sometimes trade at high valuations, which can limit future returns. Quality and price both matter.

Our page on value versus growth investing explains how investors think about price.

Large cap mutual funds must invest most of their money in the top 100 companies. Some funds have used "bluechip" in their names, but under SEBI categories they are large cap funds. These funds suit investors who want equity exposure with relatively lower swings than mid and small caps.

Our pages on large, mid and small cap funds and large cap versus index funds explain the options.

Smaller companies can grow faster but are usually riskier and more volatile. Blue chips are steadier but may grow more slowly. Many portfolios combine both, with large companies as the core.

Our page on large cap versus small cap funds compares them.

Many large established companies pay regular dividends because they generate steady cash. Dividends are not fixed and can be cut in bad years. In a mutual fund, dividends from holdings are part of the fund overall return.

Our page on what a dividend is explains how they work.

Some investors buy shares of just two or three famous companies and feel safe. If one of them has a problem, a big part of their money is affected. A diversified fund holding many large companies spreads that risk.

Our page on diversification explains why.

The word is sometimes used loosely in advertising to make products sound safe, including unregulated schemes. Check what the product actually invests in and who regulates it, rather than trusting the label.

Our page on Ponzi schemes explains warning signs.

For long-term goals, a core holding in large companies, through a large cap fund, flexi cap fund or index fund, is common. Add other categories only if they fit your goals and comfort with risk.

Our page on risk tolerance helps you judge your comfort level.

In sharp market falls, large established companies usually fall less than small ones, but they still fall. During some crashes, even the biggest names have lost a large part of their value for a while before recovering. Expect swings, and hold blue chip investments with a long time frame like any other equity.

Large, well-known companies outside India are also called blue chips. Some Indian investors get exposure to them through international funds. These bring additional factors like currency movements and foreign market conditions.

Our page on international funds explains how they work.

• Is the business large and well established?
• Has it been profitable through good and bad years?
• Is its debt manageable?
• Is the share price reasonable compared with profits?

Even then, holding many such companies through a fund is safer than relying on one.

• Blue chip: large, established, financially strong company.
• Mostly among the largest listed companies.
• Steadier than small companies, but not risk-proof.
• Diversify rather than relying on a few names.

We are distributors rather than investment advisers and we recommend no schemes. If you want help understanding large cap options, get in touch.