Defensive stocks, as the name suggests, are stocks that are less affected by the volatility in equity markets and provide stable returns irrespective of how the overall markets are performing.
These are stocks from well-established companies whose products are always in demand throughout the year regardless of the economy or market trends like healthcare and utilities.
Even though such stocks do not have great growth potential, they will protect your portfolio from losing substantial value in case of a bear market as against other equities. Investors generally use defensive stocks as a cushion to soften the impact of market volatility.
Some general features of defensive stocks:
1) The company must be well established with a history of stable returns going back at least a decade. It is generally a large-cap stock with a strong balance sheet and earrings.
2) The company must offer goods and services that never go out of fashion and are a necessity throughout the year. Such stocks cannot be cyclical, meaning in demand only at a certain time of the year.
3) The company would have paid consistent dividends for a long period of time, at least 10 years.
Stocks and Sectors
Stocks in these sectors never go out of demand as they are needed in daily household activities. Be it detergent. soap, paste or food, the consumption of such items never decreases. Moreover, it keeps rising as the income increases. Because of their stable demand, these stocks are likely to be less volatile during tough times. In India, stocks like ITC, Britannia, Marico are some examples of such stocks.
These stocks also have perennial demand and can hold value even in difficult times. The goods and services offered by such stocks are required irrespective of the market performance or the state of the economy. In India stocks like Sun Pharma, Dr Reddy's, Divi's Labs may be some examples.
These stocks are companies that provide basic services like electricity, oil, gas, water. Even though these do not have a lot of growth potential, such companies are necessary on a daily basis. These companies also offer good dividends and are generally a choice of long-term investors with low risk. Tata Power, NTPC, REC, BPCL are some examples of such companies.
Stable business models: Some companies irrespective of their sectors have very strong business models and have matured as quality companies over a period of time. Even though they may not rise massively, they are stable and provide a certain assurity and comfort to investors. Stocks like Maruti, RIL, Infosys, TCS come under this category. These stocks are good options to buy in case of volatility.
Defensive stocks also provide a good diversification tool for your portfolio. Every investor needs some cushion during a bear market and defensive stocks provide exactly that. However, since they do not give massive returns like high beta stocks, investors may want to shift to high beta stocks during a bull market but experts advise to always keep a percentage of your portfolio as defensive.
Mostly conservative investors with low-risk appetites opt for more defensive stocks in their portfolio while aggressive investors may avoid them.