Many people shy away from equity trading because they fear that they will lose money when the market becomes volatile. Then, some experienced investors seek the safety of their money when the market goes down. Defensive sector funds are an ideal investment option for investors who want to play defensive.
Let’s understand defensive sector funds in detail.
Defensive stocks are stocks that offer a shield against market fluctuations and economic uncertainty. They are also known as ‘non-cyclical stocks’ or ‘safe haven stocks’ as they are largely immune to recession, bear market, and portfolio correction.
These stocks offer consistent and constant returns, irrespective of the stock market cycle.
Defensive stocks have the following characteristics:
1. Sectors with Stable Demand
Defensive stocks belong to sectors that have a history of high stability and less volatility, especially when the market experiences a downward trend. The demand for these stocks remains fairly constant throughout the year even if the prices rise. Examples of such sectors are:
Consumer Staples (food, household, and other FMCG products)
Utilities (gas, water, and electricity)
Healthcare (medicines, hospitals, and insurance)
Telecommunication (voice and data transmission services)
2. Lower Beta
Defensive stocks usually have a beta of less than 1. For example, if a stock’s beta is 0.7 and the market falls by 8%, then defensive stocks will fall by 5.6%. If the market rises by 10%, then defensive stocks will rise by 7%.
3. Companies with a Strong Business Model
Defensive stocks invest in companies that have established and proven business model which has performed well even during the market decline. These companies have:
Stable revenue, earnings and dividends growth due to repeat business.
High-profit margin and profitability
Examples of such companies are Hindustan Unilever, TCS, Infosys, Dabur Ltd, Nestle India, ITC Ltd and Bajaj Auto among many others.
4. Higher Sharpe Ratio
Sharpe ratio indicates the performance of a fund given the risk as compared to its peer stocks in the industry. It evaluates the unit of return earned for every unit of risk. A fund with a higher Sharpe ratio is better than the lower one. Defensive stocks have a higher Sharpe ratio which means that it offers better returns in the long term with lower risk as compared to other stocks.
Should You Invest in Defensive Stocks?
In the last two years, the preference of Indian investors toward defensive stocks has increased amidst the uncertainty due to the COVID-19 pandemic and subsequent economic downturn. These stocks also have a strong performance history in the international stock market.
Hence, defensive stocks make a good investment option when you are a beginner in stock trading or want to swap your current volatile stocks for safer stocks. The only downside is that you may get lower gains during the low volatility and bullish trends. However, defensive stocks are also highly recommended to diversify your portfolio to maximise the returns and minimise the risks.
If you need more information about defensive stocks or want to invest in them, you can consult the online stock trading company Ajmera x-change. With their long-standing experience, Ajmera x-change will provide practical and effective advice on defensive stock investment to meet your financial goals.