Is it time to reduce exposure to volatile stocks and go defensive?


Following announcements by RBI Governor Shaktikanta Das of GSAP, 10-year bond yields fell about 4 basis points to 6.08%, the rupee fell nearly 1.5% – its highest ever drop in one day since August 2019. Image: Reuters

By Kaushlendra Singh Sengar

The selection of stocks in the stock markets has always been a controversial issue due to their associated distinct standard deviation. Stocks are generally categorized based on their volatility because selecting highly volatile stocks exposes investors to more risk while less volatile stocks control the risk factor. While the selection of stocks with high or low volatility depends on the type of investor, aggressive investors collect stocks with a higher standard deviation in order to make their fortune in a short period of time, but long-term investors follow suit. Buffet style of wealth creation. There is a third breed of advanced investors who follow the concept of diversification while selecting stocks to gain an advantage over normal stock market returns and avoid systematic risk.

One can easily find all these types of investors in the stock markets. However, a stock market meltdown similar to the recent drop due to the Covid-19 pandemic has spawned investors who invest in highly volatile stocks when stock markets are flipped by bears to achieve maximum gains and show their cards when the clue gets. back in the overbought zone. Although it has been observed that the timing of volatile stocks sell off when the markets start to rise and reach restore levels is difficult to assess. More often than not, investors fail to cash in the profits generated by investing in fear, as stocks with high volatility receive a lackluster response when markets rise and defensive stocks become the favorites.

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acceleration of Indian markets since March

From multi-year highs of 12,430 levels to deep lows close to psychological support of 7,500, blood has been spilled abundantly on the Indian stock exchanges, as “boost selling” was the buzz word at the time. Investors were scared and quality stocks fell to push prices down. The index started to rise as investors found 7,500 levels comfortable to bet on value and let their investments run for a while. The IT and pharmaceutical sector took the lead, agricultural stocks came into the spotlight, and the chemicals sector was the crème de la crème in the market. Reliance has forged many ties with overseas institutions with a vision of achieving 360 degree digital transformation of India, which has pushed Reliance share prices above Rs. 2,000. Many shares have more than doubled and investors with a “Buying the Fear” mindset are still sitting on an accumulation of value bets despite the 50-stock bundle hitting 15,500 stocks.

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It’s time to turn to the defensive

There is no denying that investors are always looking for an opportunity to book profit in the stock markets when the index hits an overbought position or psychological resistance and a kiss of 15,000 levels ticks all the boxes. The index has reached much higher than pre-Covid levels as vaccination against the ongoing pandemic has been developed. In addition, majority equity valuations have become expensive, which light up to illuminate long positions and re-enter at lower prices. It is high time that investors turned to defensive stocks to avoid systematic risk, as volatile stocks could hold back their returns.

No matter what type of investor you are, what salary class you belong to, what type of portfolio you want to build, incorporating an FMCG share into your portfolio is highly respected. Not only are rising markets an opportunity for investors to add FMCG stock to make a quick buck, but FMCG stocks also act as defensive when markets go through times of turbulence. The major thing that has made investors “get angry” with consumer stocks is their rapid cash conversion cycle, which has turned them into cash-rich companies and dividend-yielding stocks. Major FMCG stocks enjoy debt-free status or a low debt-to-equity ratio, which limits their cost of equity due to low-risk and interest-bearing bonds. There are sufficient entry barriers for new entrants as the old FMCG players have spent considerable funds on promotional activities for brand recognition and product line development. It is inevitable to avoid an FMCG stock while designing an optimal portfolio as they play a defensive role when systematic risk kicks in and standard deviation increases.

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(Kaushlendra Singh Sengar is the Founder and CEO of INVEST19. The views expressed are those of the author. Please consult your financial advisor before investing.)

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