What Are Defensive Stocks?

Last Updated on October 16, 2023 by BFSLTeam BFSLTeam

Explaining Defensive Stocks 

Defensive stocks are the ones that can offer steady earnings and returns, even when the economy is not doing well. These stocks belong to well-known companies that provide essential goods and services, such as food, electricity, and healthcare. For example, shares of companies in the consumer staples, utilities, and healthcare sectors are defensive stocks. These investments are less affected by economic cycles than cyclical stocks, which depend more on consumer demand and economic changes. This is the defensive shares meaning.

How Defensive Stocks Can Help Your Portfolio

Defensive stocks are a type of investment that can help you reduce your overall risk and cope with market downturns. They are less volatile and more stable than other stocks, because they provide essential goods and services that people always need. 

By adding these stocks to your portfolio, you can balance out the potential losses from more risky securities. However, there is no one-size-fits-all answer to how much of your portfolio should be in defensive stocks. It depends on your personal goals and risk tolerance.

What Makes a Defensive Stock?

A defensive stock is a type of stock that does not depend on the stock market movements. This can be good or bad depending on the economic situation. When the economy is bad, having defensive stocks in your portfolio can help you avoid big losses. Even when the market is down, these stocks can give you stable returns. But when the economy is good, having defensive stocks can make you miss out on high returns.

This feature of defensive stocks is related to their low beta, which is usually less than 1. Beta measures how much a stock moves with the market. For example, if a stock has a beta of 0.5, and the market falls by 10%, then the stock will fall only by 5% (0.5 x 10%). But if the market rises by 20%, then the stock will rise only by 10% (0.5 x 20%).

Investors tend to buy defensive stocks when they expect the market to fall, because they can protect them from volatility. But active investors switch to high beta stocks when they expect the market to rise, because they can maximise their returns.

Also Read: Treasury Stock

Why Invest in Defensive Stocks?

Defensive stocks are a type of investment that can offer lower risk than cyclical stocks, which are more sensitive to economic changes. Investing in any stock involves some risk, including the possibility of losing money. But these stocks are less likely to lose value when the stock market or the economy is struggling, because they provide goods and services that people always need.

Another benefit of defensive stocks’ low volatility is reliability. The return on defensive stocks is usually steady and consistent, as are the dividends if the company pays them. This can make it easier to estimate how your investments will grow over time. This might be attractive if you have a specific financial goal or retirement plan.

The Drawbacks of Defensive Stocks

Defensive stocks are not very exciting when the market is booming. They tend to grow slowly and lag behind other stocks. When other stocks are skyrocketing, defensive stocks are more likely to underperform the market.

Defensive stocks may also be risky to trade during a market downturn. They may become overpriced during a recession because many people are buying them, pushing up the share price for buyers.

Also Read: FAANG stocks

What are the Defensive Stocks in India Sectors?

The economy is made up of different pieces, from small to large. Companies are the smallest pieces, and they belong to different industries based on what they do. Industries are grouped into sectors based on their common characteristics. There are eleven sectors in the US stock market, and some of them are defensive sectors. Defensive sectors are the ones that provide goods and services that people always need, no matter how the economy is doing. If you want to invest in defensive stocks in India, you might want to look at companies that have a long history of success in these sectors.

Defensive sectors like healthcare, consumer staples, and utilities can help your portfolio stay stable during downturns.

These sectors cater to people’s basic needs, and they don’t depend much on consumer demand or economic changes. People still need to pay for utilities, buy groceries, and get healthcare even in a recession. That’s why defensive stocks have low volatility, stable earnings, and steady dividends in good times and bad times. But they also grow slowly and don’t perform well when the economy is booming.

• Utilities sector

This sector includes companies that provide electricity, gas, water, and renewable energy sources like solar and wind power. People don’t usually cut back on their utility bills even in a recession, so the value of stocks in this sector doesn’t change much.

• Consumer staples sector

This sector includes companies that make or sell food, drinks, tobacco products, personal and hygiene products, and household goods that don’t last long. These are things that people can’t or won’t stop buying even when they have less money. Unlike stocks in the consumer discretionary sector, which includes companies like car makers and hotels, stocks in consumer staples don’t drop much when people spend less during a recession.

• Healthcare sector

This sector includes businesses that offer medical services and insurance, make medical equipment or drugs, or run hospitals, clinics, labs, and nursing homes. Healthcare is a necessity and medicine and medical equipment are always in demand, so this sector has strong defensive investment opportunities.

• Apartment REITs

Apartment real estate investment trusts (REITs) are a type of investment that can be defensive, because people always need a place to live. If you want to invest in apartment REITs, you should avoid the ones that focus on very expensive apartments. You should also stay away from REITs that own office buildings or industrial parks, which could have more problems with tenants not paying rent when the economy is bad.

How to Reduce Risk with Defensive Stocks in India and Diversification

If you want to protect your investments from bigger losses during a recession or economic downturn, you might want to consider a defensive investment strategy. One way to do that is to invest in defensive stocks, which are less likely to lose value when the market is down. But that’s not enough; you also need to diversify your portfolio with different types of holdings that are not all affected by the same market risk.

Also Read: Alphabet Stock

Summary

You may wonder why you should invest in defensive stocks instead of risk-free investment options. Why not invest in treasury bills or other safe options when the market is down? The answer is that defensive stocks can offer you a chance to earn dividends at a higher rate than the interest on treasury bills, with less risk than other stocks. Investors are attracted to defensive stocks because they can provide stable returns even when the market is struggling.

As an investor, you should take calculated risks and be prepared for the ups and downs of the market. A proper knowledge and understanding of the market and stocks before investing will help you get better returns.