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

Prasanth Menon

02 Sep 2017

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.

Have Referral Code?

Similar articles

  • Responses
  • Patidar Samaj

    - 2 hrs ago

    This article claims RJio was given a "Backdoor Entry" into the 4G Based Voice Routing. The peculiar aspect is without the Voice License, Rjio would have been a mere ISP. With the license, it is now a holistic communications service provider, with ability to exponentially scale the bouquet of products. The events indicate it was meticulously planned way before the auctions because the auctions were clear on the agenda: 4G for internet only.

Load More
mutual-fund

Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


Banner

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

Prasanth Menon

02 Sep 2017

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.

Have Referral Code?