Posted on 12/30/2022 12:02:00 PM

Mutual funds allow you to invest in several assets, including stocks and bonds. Depending on your financial goals, you can invest in a fund having exposure to one or several assets.

Blue chip equity mutual funds are among the more popular types of equity funds as they allow investors to own the largest companies in India. Blue chip mutual funds invest in blue chip companies, which make up a significant fraction of the market. Blue-chip companies are leaders in their domains and have a large market capitalization, stable and consistent earnings, and constant growth.

However, various blue-chip fund options are available in India. You must choose the most suitable investment to meet your financial goals.


What is a blue-chip stock?

Blue-chip stocks are shares of leading companies that contribute significantly to the industry. Some of the hallmarks of a blue-chip stock include:


  • Large companies
    The most basic way to identify a blue-chip company is to check its market capitalisation. Companies that are giants in their domains and hold extensive market caps can be classified as blue-chip companies, and their stocks are known as blue-chip stocks.


  • Market leader
    Blue-chip companies are the market leaders in their field. To know if a company is a blue-chip company, you can check whether it is a market leader in its sector or not. Some examples of blue-chip stocks are Tata Consultancy Services (TCS), Infosys Limited, Reliance Industries, ICICI Bank, [PVT1] [AJN2] etc.


  • Steady financial history
    You can check a company's financial history to classify it as a blue-chip stock. It takes years to become a blue-chip stock, and a company's financials reflect the journey through the years. Blue-chip companies have a steady financial history, demonstrating constant growth.


  • Promising growth
    You can find several companies that grow rapidly due to favourable market conditions but soon come to saturation as the demand for their product and services decreases. However, blue-chip companies have maintained reliable growth records over the years. This promising growth prospect makes these companies an excellent investment option.


How to choose the best blue-chip stock for your portfolio?

You can find numerous companies with large market capitalisations. But not all the companies with large market caps come under the blue-chip category. Investors often miss this difference, but here are some factors that can help:


1. Market capitalization

Market capitalisation is the total value of a company's outstanding shares in rupees. To calculate a company's market capitalisation, multiply the total number of shares by its market value. When choosing a blue-chip company, the first step is to find a large-cap company leading in its sector.


Choose the sector you wish to invest in, depending on your preferences and portfolio. Then, search for the top companies according to their market capitalisation.


2. Company's income

In addition to the market capitalisation, you must also look for the company's income/revenue. Usually, companies with more significant market shares have considerable revenue. To make the comparison easier, you can consider the top 10 or 20 companies based on their income.


3. Return on Equity (ROE)

ROE is a ratio that helps you identify the profitability of a company in comparison to the shareholder equities. Every company has a different ROE. Compare the ROE of companies from the same sector to know which companies use shareholder equities efficiently to generate profit.


4. Return on Assets (ROA)

Unlike ROEs, the calculation of ROA also includes the company's debt. It is the most common way of determining a company's profitability and how efficiently it uses its resources to generate profit. To find a blue-chip company, you need to go through their ROAs over the period. Decent ROAs also ensure that a company can withstand adverse market conditions efficiently.


5. Company valuation

Investors consider market capitalisation when valuing a company. However, it is not the right way since the market cap is based on the price you pay for the company's stock and not the company's real valuation. Also, the stock price is volatile and depends on several factors, such as demand, supply, economics, and macroeconomics. When looking for the best blue-chip company, consider the company's valuation in addition to the market capitalisation.


Blue-chip companies offer consistent performance and benefits such as regular dividends, predictable growth trajectories, and lower volatility, making them a suitable investment option. However, you need to research and find the best blue-chip fund to invest in based on your portfolio and investment preference.


Many mutual fund houses offer blue-chip funds for investors, helping them invest in several blue-chip stocks at once. You can invest in such funds directly through the fund house’s website or a fintech platform.


Mutual fund investments are subject to market risks, read all scheme related documents carefully.



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