Why you should get into low beta stocks in the current scenario?

Why you should get into low beta stocks in the current scenario?

by Prasanth Menon Last Updated: 2017-02-09T04:30:00+05:30
We are often left wondering about how investors assess the risk factors of stocks in the market. The concept of risk is often confusing to understand, and one of the most common measures of stock is 'Beta'. In simpler language, Beta is the measurement of a stock's volatility in relation to the changes in overall market.

Capital asset pricing model (CAPM), which is used to calculate the cost of equity, majorly depends on beta. A stock that has a market value above 1.0 is considered high-beta, whereas a stock with a market value lower than 1.0 is considered as low-beta. The beta, in any market across the world, is 1.0. Investors have to figure out a way to maintain exposure to equities, with the recent volatility in the stock market.

Investing in low-beta stocks has become a highly popular trend among many investors now. You can build a low-risk portfolio with a beta between 0 and 0.6 as your prime criterion.

What are the advantages of low beta stocks?

The low-beta approach can help protect your portfolios against market downturns, and also potentially outperform the broader market.

1) Consider the stock price variability, when assessing the risk of your portfolio or investment.
2) Stock portfolios which have low beta stocks tend to outperform high-beta stocks. The secret for well-performing investments is low volatility of your stocks.
3) In relation to broad market benchmarks, a few beta strategies have low-beta or volatility. 
4) As per research and studies, there seems to be no systematic risk in including low-beta stocks in your portfolio.
5) Stocks of high-beta sectors of real estate and infrastructure tend to perform better in a rising market and worse in a falling market. Whereas, FMCG and Pharma which are low-beta stocks, do not rise as much as the market and do not fall as much as well. 
6) Low volatility stocks have outperformed post financial crisis. 
7) Strategies with low-beta investments can provide risk-averse investors with ways to maintain a few of the upside potential from equities, and also manage the risk of their portfolio.
8) Bond proxy stocks have an expected steady share price, and that can be seen in low-beta stocks.

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