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What Are The Safest Investments During A Bear Market?

Is the current downturn merely a hiccup in the bull market? Is it possible that we are on the verge of start of a bear market? Vijay Kedia, renowned for buying multi-baggers early, says, “Nobody knows what a bull market or bear market is, but everybody defines phases in the market according to their positions and how their portfolios are performing.”

You might be wasting your time if you’re thinking about timing a bull or bear market. It may be better to examine specific stocks and place your bets accordingly. 

This article explains where you should invest during a bear market and what strategy you may follow to save you from losing money.

What is a Bear Market?

A bear market occurs when benchmarks fall for an extended period. It usually refers to a situation in which stock values have fallen by 20% or higher, from the highs, in a particular short period (generally 2 months or more). The fall may be in comparison to the recent highs, on back of widespread pessimism and negative investor sentiment. 

The Bear Market In India

In common parlance, a bear market occurs when the values of leading indexes fall by 20% or more. According to Morgan Stanley’s analysis in 2020, Indian stocks had seen four bear markets in the last 25 years then. 

 The status of the bear market in India is 4-6 months old (by February 2022) for the investors investing in small and mid-cap company stocks. These stocks have also seen a price drop up to 70% while in Nasdaq, the new-age stocks had a price fall up to 80%.

Where Should You Invest in a Bear Market? 

Can equities, which could be riskier than other investment options (like gold, bonds etc.), be used as a hedge? The answer is yes. Many equity investors buy defensive stocks when there is no obvious direction from the current instability in the bond and equities markets.

But, what are the other options for you to invest in during the bear market?

Defensive Stocks

Defensive stocks mean investing or buying stocks of large and stable companies. They pay steady dividends and have regular earnings regardless of the overall state of the stock market. Because these companies’ products are in continual demand, defensive stocks tend to be more stable throughout the business cycle.

You can categorize stocks depending on characteristics such as Beta (a measure of stock price fluctuation relative to the broader stock market) and return on equity (ROE). 

A defensive stock often has a Beta of less than one, indicating that its price fluctuates less in comparison to the market.

Exchange Traded Funds (ETFs)

Inverse ETFs, Bear ETFs, or Short ETFs are the ETFs that provide the inverse performance of their benchmark index. They operate via short-selling, trading derivatives, and other investment strategies.

An inverse ETF benefits when the index’s performance falls. A beta of one indicates that the stock price moves at the same rate as the general market, whereas a beta of less than one means that the stock moves less than both the upside and downside of the overall market.  

Gold

The widespread belief among Indian investors is that gold is one of the safest investments since it recovers its value during economic downturns. Its value rises proportionately with a fall in the stock market or fluctuations in the overall economy. Gold is also a safe refuge during inflationary times since it holds its value better than currency-backed assets.

The process of investing in gold differs from investing in stocks or bonds. Various banks, dealers, and brokerage firms sell bullion and coins, gold mining firm stocks, gold futures contracts, gold-focused exchange-traded funds, and other traditional financial instruments.

Short-term Bond Funds

When contemplating bond investments during a downturn, you must understand why they perform well. A market crash followed by a bear market indicates a long period in which stock price performance may lag. AAA bonds might be a considerably more attractive investment for investors because, unlike a stock portfolio, bond investors can rely on set interest payments as long as they keep the bonds.

Large Cap Mutual Funds

Large-cap funds invest most of their assets under management (AUM) in equity shares of companies with large market capitalization. These companies are popular in the market and have a good reputation. With the top large-cap funds, you can be confident that you are investing in companies with a proven track record of long-term success.

Compared to small-cap and mid-cap funds, these funds represent less risk and are maybe one of India’s safest investments in the bear market.

Apart from the above options, you also need to have the right investment strategy in place so that you do not panic-sell during a bear market. 

Investment Strategy During Bear Market

Keep Calm and Consider Investing for a Long Term

Selling in a panic during a bear market could be one of the costliest blunders you can make as an investor. Irrespective of your location globally, panic selling is common among investors during a bear market. You should stay invested for a more extended period to help you fetch better returns. 

Shed the Losers and Hold onto the Winners

If you’re investing on your own and getting troubled by the market distractions, there’s a good chance you’ll cut your wins. Because many companies may struggle or even go out of business during a bear market, it is one of the most acceptable times to identify the losers in your portfolio.  

Shift to SIPs

You may consider investing monthly in a Systematic Investment Plan (SIP) for stocks, and SIPs are an excellent strategy for investing during falling markets. Since you invest a certain amount in stocks monthly, the probability of losing a lot of money is minimal because it averages out the price fluctuations.

Pick Growth Stocks

You may consider investing in growth stocks during the bear market since their prices are low. The bear market can be an excellent time for you to invest in stocks that have the potential to grow. Hence, instead of panic selling, you may plan to invest in stocks at a lower price.

The Bottom Line

When equities are falling, people’s gut reaction is often to panic-sell the stocks, thinking they will lose more money if they stay invested. It’s critical to understand your risk tolerance and how price swings may influence you ahead of time. You can reduce market risk by diversifying your portfolio with various investments, having a low correlation with the stock market.

At WealthDesk, we offer you readymade WealthBaskets consisting of stocks or ETFs reflecting an investment strategy or theme designed explicitly by the SEBI-approved investment professionals and make your investment journey hassle-free.

FAQs

Is it safe to invest in the Indian stock market right now?

Yes, investing in Indian stock markets is safe; nevertheless, research and planning are a must, as with any investment. Without the necessary research and planning, investors are prone to making rash judgments that can result in losses.

In a bear market, where should I put my money?

Defensive stocks, exchange-traded funds, gold, short-term bond funds, and large-cap mutual funds are where you can put your money in the bear market.

What is the Indian bear market?

In a bear market, the price of an investment declines by at least 20% from its high. A bear market is a long-term trend of declining stock values.

What should be an investors’ strategy during a bear market?

Investors who have invested less in equities might benefit from market troughs to boost their equity holdings. Long-term investors should avoid making hasty decisions and instead stick with their investments. 

But, you should avoid aggressively investing in stocks when you already have invested more in equity stocks in your portfolio. Instead, you can reinvest a portion of the equity holdings into hybrid schemes.

What Are The Safest Investments During A Bear Market?

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What Are The Safest Investments During A Bear Market?

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