As an investor, it’s always important to have a balanced and diversified portfolio. There are many different strategies and approaches you can use to achieve this goal. One way to achieve this is by including defensive stocks in your investment strategy. 

But what exactly are defensive stocks, and how do they differ from other types of stocks? In this blog, we’ll explore the concept of defensive stocks, their characteristics, and their potential benefits for investors.

What are Defensive Stocks?

Defensive stocks are a type of investment that can provide consistent returns regardless of the overall market or economic conditions. The term “defensive” implies that these stocks can safeguard your investment from the negative impact of market or economic downturns.

Characteristics of Defensive Stocks

Lower beta

Defensive stocks usually have a low beta, which measures the stock’s volatility relative to a benchmark index such as the Nifty 50 or Sensex. Typically, the beta of defensive stocks is less than 1, indicating that they are less volatile than the overall market. 

For example, if a stock has a beta of 0.6, it suggests that if the market increases by 10%, the stock may only rise by 6%. Conversely, if the market decreases by 10%, the stock price may only drop by 6%.

Focused on non-cyclical industries

Some industries, such as automobiles, have higher demand during economic upswings and lower demand during recessions or bearish phases. However, defensive stocks are typically from non-cyclical industries, such as FMCG companies, which have stable and predictable demand regardless of the state of the economy.

Attractive dividend yield

Defensive stocks often offer higher dividend yields, making them a reliable source of consistent returns. Several defensive stocks, such as ITC Limited, ONGC, Oil India, GAIL, and Coal India, have a history of paying high dividend yields. By investing in these stocks, you can earn regular income from dividends while also benefiting from potential capital gains.

Which Industries Have Defensive Stocks In India?

Defensive stocks can be found in several industries in India that offer stability and predictable returns even during uncertain market conditions. Let’s take a look at some of these industries:

Utilities

Companies involved in providing basic utilities such as gas, electricity, and water, enjoy stable earnings as the demand for these services remains consistent, regardless of the economic cycle. As a result, utility stocks are less likely to suffer significant drops, even during unfavorable market conditions.

Consumer staples

Companies that produce and sell food, beverages, hygiene products, household items, tobacco, alcohol, and other essentials enjoy predictable demand as people consider these products necessary for their daily lives. 

Though the stocks of these companies may not offer significant returns during a robust economy, they tend to outperform consumer discretionary stocks (companies involved in car manufacturing, hotels, luxury items, etc.) during weaker economies.

Healthcare

The demand for medical products and services is typically unavoidable and essential, making the insurance and pharmaceutical industries considered defensive sectors that can perform well, even in a market fall. During the COVID-19 pandemic, many pharmaceutical stocks performed well when the overall stock market was under stress.

Advantages and Disadvantages of Investing in Defensive Stocks

Investing in defensive stocks may offer stability and lower risk to investors, but it may also limit their potential for significant returns. Let’s take a closer look at the advantages and disadvantages of defensive stocks.

Advantages

Stability: Defensive stocks are usually part of industries with stable and predictable demands, offering consistent returns over the long term.

Lower Risk: These stocks are considered less risky than other types of stocks as they are less likely to lose their value significantly.

Outperformance in Economic Decline: Defensive stocks are likely to perform better than the overall market during economic downturns, maintaining their earnings and providing returns in the form of dividends.

Disadvantages

Lower Probability of Significant Returns: Defensive stocks may help investors protect their wealth but may not help them quickly build it.

Higher Price: In an economic slowdown, defensive stocks may become overvalued due to high demand, which may decrease potential returns.

Underperformance in Economic Boom: These stocks may not see significant growth in an economic boom, which may not enable them to provide great returns compared to the overall market.

Why Include Defensive Stocks in Your Investment Portfolio?

In a booming market, watching your investments grow can be exhilarating. But when the market takes a turn for the worse, the stress of losing significant value can be overwhelming. This is where defensive investments come into play, offering potential protection for your portfolio during tough economic conditions.

Final Conclusion

Defensive stocks can safeguard your investments from losing value in unfavourable market conditions. However, allocating more of your portfolio to defensive stocks may limit your potential for significant returns during favourable market conditions. 

Therefore, it’s essential to make informed investment decisions that consider the current market conditions while allocating money to defensive stocks.