Defensive Investment Strategies to Protect Your Portfolio

Are you looking to protect your equity portfolio from extreme stock market volatility? Do you want a cushion for your equity portfolio in a bear market? It would help if you considered defensive investment strategies to shield your portfolio. A defensive approach for equity investments enables you to win more by losing less money. As stock markets grow volatile, you must consider allocating a portion of your portfolio towards defensive assets. Let’s look at defensive investment strategies to protect your portfolio. 

• Invest in stocks of defensive sectors

Healthcare, FMCG, Utilities, and Technology are defensive sectors in India. One of the primary characteristics of defensive stocks is that stock market movements do not severely impact them. Many of these industries are recession-proof to an extent. For instance, people use soaps, pastes etc., even in a recession which benefits the FMCG industry. 

Many investors pick up stocks of defensive sectors when they expect a stock market downturn. It protects their stock portfolio from a severe crash if the stock market corrects by around 10%. 

Investors can pick stocks of companies that give regular dividends as part of the defensive investment strategy. Many of these firms are well established and have a track record of profits. Moreover, you could diversify your stock portfolio across the healthcare, telecommunications, FMCG etc., to protect your stock portfolio from a market correction. 

• Focus on fixed income investments and gold

It would help diversify your portfolio across equity and fixed income investments to cushion against adverse stock market movements. For example, many aggressive investors have a portfolio biased towards equity investments. 

However, you can allocate a portion of your portfolio towards fixed-income investments such as debt funds, PPF, NSC, and bank FDs. Some of these investments are suitable even for aggressive investors as they offer the dual advantages of tax saving and regular income. 

Market experts recommend having around 5%-10% of your portfolio towards gold holdings. It cushions your portfolio as gold is a hedge against inflation. However, you can invest in Gold ETFs and gold funds instead of physical gold to avoid storage hassles. 

• Rebalance your portfolio

Investors must rebalance their portfolios at least once a year to align with investment objectives and risk tolerance. For instance, some assets outperform other assets in your portfolio, which moves it away from the original asset allocation. 

You will have to rebalance the portfolio to align with the original allocation. It typically involves selling a portion of the outperforming asset class and allocating the money towards the poorly performing asset class. Moreover, you can bring in fresh funds and invest in the poorly performing asset class. 

• Keep money ready to buy stocks

It would help if you had cash ready to buy stocks when markets crash. A stock market correction gives you an excellent opportunity to buy stocks of companies with solid fundamentals at a lower price. 

However, you will miss this opportunity if you don’t have the money to buy the stocks. Even mutual fund managers keep cash in hand to profit from options to purchase quality stocks at lower prices during a market downturn. 

Many people seek a defensive investment strategy to protect their portfolios from stock market volatility. However, you must follow a defensive investment strategy and allocate a permanent portion of your portfolio towards defensive investments. In a nutshell, follow a defensive investment strategy to avoid knee-jerk reactions to a stock market correction. 

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in.