Defensive stocks, as the name suggests, have historically done well during market corrections ? beating Sensex returns on 90% of the occasions when the markets demonstrated a substantial correction.

FE created a market-cap weighted defensive stock index including 19 stocks from FMCG and Pharma and studied its behaviour pattern vis-a-vis that of Sensex since Jan 2003. FE Defensive stock index gave a return of 150% vis-a-vis 450% for Sensex since 2003. While it showed a high correlation of 0.9 with the Sensex with a beta of 0.67, it was also found to protect overall portfolio in bad phases – in 27 out of 30 such corrective occasions. A beta of 0.67 shows that for a one per cent fall or rise in Sensex, the FE defensive stock index moves by 0.67% down or up respectively.

The equity markets do not move in a straight line; so these defensive stocks tend to protect the overall returns of a portfolio in testing times, acting as a guard, especially when the market correction is driven by sentiments rather than fundamentals. While investors could get triple the returns from investing in Sensex vis-a-vis defensive stocks, defensive stocks also help protect one?s portfolio during bad phases.

According to Alex Mathews, research head at Geojit BNP Paribas Financial Services, ?Ideally, an investor should look to allocate about 20-25% of the corpus in defensive sectors like FMCG, pharma and healthcare, as they do indeed outperform the broader market returns during a corrective phase.?

However, as Piyush Garg, CIO at ICICI Securities points out, it is very essential to understand the nature of market correction in order to effectively churn the defensive portion of one?s portfolio.

According to him, defensive stocks generally do well when the market corrections are more technical or remain range-bound. ?However, when the correction is a result of overall rerating of market due to developments in macro-economic fundamentals, it becomes inevitable to reweigh even the defensive portion of one?s portfolio, especially if the market decline persists for a long duration,? he said.

Mathews suggests stock rotation among defensive sectors based on the outlook of individual stocks as an alternative strategy.

?In case of a fundamentally negative development, like rising inflation, to an extent the portfolio can be managed by flip-flopping between various sectors that are defensive in nature to stocks like Cipla, which have a significantly low beta,? he said.