What are Defensive Stocks? Overview, Pros, and Cons

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  • 20 Nov 2023
What are Defensive Stocks? Overview, Pros, and Cons

Key Highlights

  • Defensive stocks can be considered a group of stocks that have certain characteristics that can help you balance your financial portfolio.
  • It can be stocks which have low volatility even in times of crisis or bear market conditions
  • You can research and list defensive stock to know its pros and cons.

Defensive stocks are stocks that tend to hold up better than the overall market during periods of volatility or economic downturns in the share market. While they may not generate spectacular returns during bull markets, defensive stocks provide steady dividends and less volatile share price movements, making them a more conservative investment for your financial portfolio.

Some key characteristics of defensive stocks that you can explore are low beta, high dividend yields, inelastic demand for their products, and steady earnings growth. Defensive stocks tend to come from financially strong, established companies in sectors like consumer staples, healthcare, and utilities. These companies provide products and services that customers continue to need regardless of economic conditions, like food, medicine, or electricity. As a result, their revenues remain stable even during recessions. Defensive stocks can provide ballast for an investment portfolio since their dividends and share prices won't sink as dramatically as cyclical stocks during market declines. While they may underperform during rallies, defensive stocks offer resiliency and can moderate portfolio swings.

Consider this example where you can relate a low beta stock that is generally less than 1 and if the beta stock has 0.5, where the current market condition will fall by 20%, then the stock will fall only by (0.5 x 20%) now the defensive stock will get affected by only 10%. Similarly, when there is a 10% fall in the stock market, there will be around a 5% fall of defensive stocks.

Sr No Top Defence Companies in India
1.Hindustan Aeronautics Ltd
2.Avenue Supermarts
3.Dabur LTD
4.TCS
5.Wipro
6.Cipla
7.Bharat Earth Movers Limited (BEML)
8.Paras Defence and Space Technologies

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Investors should conduct their own research and consult with financial professionals before making any investment decisions.

Some of the industries covered by the defensive stocks are as follows:

1. Consumer Staples

This includes companies that produce and sell essential food and household products that customers need to purchase regardless of the economy, like groceries, toiletries, tobacco, and cleaning supplies. Defensive stocks in this sector see steady demand. Therefore, due to its necessities in the tough time, this stock can offer better returns. Examples include giants like Hindustan Unilever, ITC, and Nestle.

2. Healthcare Industry stocks

This type of stock provides necessary medical products and services. People still need drugs, devices, and healthcare even during downturns. Although, with the addition of new competitors, these types of stocks seem to perform in a less defensive manner. Some of the top defensive stocks here include Sun Pharma, Dr. Reddy's, and Divi's Labs.

3. Utilities

Utility stocks include supplies of basic amenities like electricity, gas, and water, which remain in demand at all times. Some defensive utility stocks in the stock market are NTPC, Power Grid, and Tata Power.

Defensive stocks play an important role in balancing out the risk profile of an investment portfolio. When selected strategically, defensive stocks provide much-needed stability to your financial portfolio during volatile market conditions. While other stocks may see wild price swings and heavy losses in economic downturns, defensive stocks hold value better and continue providing steady dividends. This cushions the overall portfolio during bear phases in the market.

Defensive stocks also enhance diversification in a portfolio that may be overweight on high-growth stocks across similar industries. Adding defensive stocks from sectors with inelastic demand, like consumer staples, healthcare and utilities etc, counters the cyclicity of discretionary purchases. This balanced asset allocation reduces volatility over the course of varying business cycles. Defensive stocks act as a safe haven, reducing the downside risk during recessions while still generating reasonable returns during stable markets. For risk-averse investors, defensive stocks are core portfolio holdings vital for both capital preservation and regular income.

Conclusion

As we covered defensive stocks in India. You can understand the role of defensive stocks and more about. Therefore, during the downfall in the stock market you can invest in various types of securities that can be helpful . You can explore different investment opportunities from the stock market using the Kotak Securities platform.

FAQs on Defensive Stocks

The main defensive sectors in India are fast-moving consumer goods (FMCG), pharmaceuticals, information technology, and utilities. These provide goods and services that see steady demand regardless of economic conditions of the stock market.

Some leading defensive stocks in India include Hindustan Unilever, ITC, Nestle India, Sun Pharma, Dr Reddy's, TCS, Infosys, NTPC, PowerGrid, Asian Paints, and Marico.

Defensive stocks provide stability in times of market volatility, steady dividends, diversification from cyclical stocks, and a lower risk profile. They balance their portfolio returns over different market cycles.

Defensive stocks are usually more suitable for long-term investors than short-term traders.

Investors need to look for stocks of financially strong as well as established companies in non-cyclical essential sectors with a history of consistent dividend payouts, stable revenue streams, and low debt levels. Analyze their past performance across market cycles.

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