Blue-chip stocks are highly priced market stocks, which have emerged as a preferred investment option over recent years.
The companies that issue blue-chip stocks are highly esteemed in the stock exchange market and tend to have a stable financial record and credibility.
Besides their repute, the fact such companies extend attractive dividend pay-outs can be credited for the growing popularity of the said stock.
However, before investing in blue-chip companies, individuals should equip them with a few essential details.
For starters –
What are Blue-chip Stocks?
Stocks that are issued by blue-chip companies, i.e. companies with a large market capitalisation are termed as blue-chip companies.
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Companies who issue these shares are well-established and enjoy great market repute; therefore, the shares issued by them are highly valued in the market.
Individuals can invest in Blue-chip stocks in India either directly or through Mutual Funds.
Features of Blue-chip Stocks
The features of Blue-chip stocks are enlisted below –
- Assured returns: Blue-chip stocks generate returns quarterly in the form of dividends. The fact that companies that are well-established also serve as a safe investment avenue for most investors. With this safety comes the assurance of earning steady but guaranteed returns.
- Credit-worthiness: Blue-chip companies have enough capital to clear their financial dues and obligations easily. This, in turn, makes the shares issued by such companies high in creditworthiness.
- Risk factor: Since big companies with stable financial performance issue these stocks, the risks factor associated with blue-chip companies are comparatively less. Investors can further reduce the burden of risk associated with blue-chip shares by diversifying their investment portfolio.
- Investment horizon: The term of investment is usually over 7 years. Such extended term makes Blue-chip suitable for achieving long-term financial goals owing to its long investment horizon.
- Growth prospect: Blue-chip companies are those large companies that have reached their maximum growth potential. This influences the Blue-chip shares who undergo slow but steady growth over time.
- Taxation: The gains generated through blue-chip shares in India are treated as income under Section 80 C of the Income Tax Act. The short-term capital gains are subjected to taxation at the rate of 15%. However, the long-term capital gains exceeding Rs. 1 Lakh are subjected to taxation at the rate of 10%.
Reasons to Invest In Blue-Chip Stocks
Blue-chip stocks in India are considered to be a desirable investment option for achieving long-term financial goals.
Here are a few reasons to invest in Blue-chip shares –
- It offers higher returns that are paid quarterly.
- Facilitates corpus building.
- Facilitates portfolio diversification.
- Cushions the impact of the recession, inflation and economic stagnation.
However, owing to their higher price, blue-chip shares may not be suitable for small investors.
Who should invest in blue-chip stocks?
Blue-chip stocks are those stocks that offer consistent returns and have minimum risk attached. Such stocks are ideal for those investors who want secure returns. It is a good source of investment for all such investors who do not want to let their investment be affected due to market volatility.
Major Advantages of Investing In Blue-Chip Stocks
The strong financial standing, excellent market valuation and credit worthiness of blue-chip stocks act in favour of their investors and extend multiple benefits to them.
Blue-chip stocks investors would avail these following advantages –
- Stable and regular dividends: Irrespective of the market conditions, blue-chip stock investors avail stable returns on their investments. Such returns are generated in the form of divided which are extended to them quarterly.
- Opportunity to achieve financial goals: Being a long-term investment option that comes with an investment horizon of over 7 years. It gives investors ample time to build a healthy corpus over the years for their respective financial goals.
- Advantage of portfolio diversification: Blue-stock companies are high-profile business organisations who do not generate revenue from just one channel. It not only allows them to cushion their losses against operational setbacks but also allows their investors to spread out the associated risks of blue-stock shares.
- Liquidity: Blue-chip companies enjoy market goodwill and high creditworthiness. It directly enhances the market value of blue-chip stocks and makes them an attractive investment option for investors. This directly facilitates the purchase and sale of such stocks making the liquid in nature.
Alternative Investment Options
Owing to their market goodwill and credibility, blue-chip shares in India come with a low-risk factor. The low-risk burden further makes them suitable for risk-averse and conservative investors.
However, investors who want to earn greater returns with limited exposure to market risks can opt for these alternative investment options –
- Real estate
Even though the growth of the real estate market in India has slowed down a little, it is still one of the most profitable investment avenues in the county. Investors can purchase, rent or sell residential and commercial properties and generate income in due course.
- Exchange-Traded Funds
ETFs are a collection of securities which are traded on exchanges which are considered as a low-risk investment option. ETFs often comprises of stocks, bonds, commodities and other investment instruments and come with a low expense ratio and lower associated charges.
As per their requirement, investors can invest in Gold ETFs, Liquid ETFs, International ETDs or Bank ETFs.
- Fixed deposits
Investors who want to generate returns and tax benefits on the same can invest in fixed deposit schemes instead of blue-cap stocks.
Depending on their requirement, investors can park their money in fixed deposits for both long-term and short-term. FDs also allow investors to avail of a loan against it in case of an emergency.
- Government bonds
Government bonds are low-risk investment options that are issued by the government of India and monitored by the RBI. Such bonds extend fixed interest to their investors and allow them an opportunity to diversify their investment portfolio. Additionally, government bonds extend tax benefits to investors and offer liquidity.
Blue-chip stocks in India are an attractive investment option for individuals who want to generate steady returns over a long period. However, investors can always explore other investment avenues and enhance the profitability of their investment portfolios.
Additionally, they must realize the need to prioritize their financial goals, income and risk appetite before investing in any investment option.