Motilal Oswal Nifty India Defence Index Fund, a passive fund based on defence sector, lost the most of around 5.21% in the last one month. Launched in July 2024, the scheme manages assets of Rs 2,330 crore as on July 2024.
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HDFC Defence Fund, the only active fund based on defence sector, lost around 2.86% in the said time period. Launched in June 2023, the scheme manages assets of Rs 3,930 crore as on July 2024.
The defence sector mutual funds have offered stellar performance over a period of time. What factors made these funds offer negative returns in the last one month?
“The defence stocks had rallied significantly over the past year or so on the back of strong order book and significant increase in the defence exports. The sector has also benefited immensely by the government’s increased defense spending with focus on indigenization and modernization. However, rich valuations coupled with less than expected budget outlay for the sector in the recent budget has led to a correction in defence stocks over the past month or so,” commented Nilesh D Naik, Head of Investment Products, Share.Market.The lumpsum subscriptions and systematic transactions were discontinued in HDFC Defence Fund with effect from July 22, 2024.The defence sector became an attractive option among mutual funds as many mutual funds launched new funds based on this sector.
Following the launch of the HDFC Defence Fund a year ago, Motilal Oswal introduced the Nifty India Defence Index Fund. Recently, Groww Mutual Fund and Aditya Birla Sun Life Mutual Fund have also launched passive funds based on the defence sector. Groww Nifty India Defence ETF and Aditya Birla SL Nifty India Defence Index Fund are still under their NFO period. Motilal Oswal Mutual Fund has also filed a draft document with Sebi for an ETF based on the defence sector.
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HDFC Defence Fund, the only fund to complete one year in the category, gave 101% return in the last one year. In the last six months and three months, the fund offered 41.42% and 11.60% returns, respectively.
After a stellar performance by defence sector based mutual funds, the recent performance has been subdued. The important thing is should the investors be concerned about their existing investments in these funds or should they make further allocation at this point of time?
“Defence is a very narrow theme and hence the volatility of funds tracking such a theme can be significantly higher than diversified funds. As such, most investors will be better off investing in more diversified funds for their long term investing needs and letting the professional fund managers manage the allocation to individual sectors and themes,” recommended Naik.
He also mentioned that, “Sectoral or thematic funds should never be part of investors’ core holdings. Only savvy investors with a very high risk tolerance and having a deep understanding of the dynamics of individual sectors in terms of growth, profitability, valuations, risks, etc could consider having a tactical allocation to sectors and narrow themes based on their views.”
For the current performance, an analyst mentioned that the defence stocks are currently witnessing corrections after they have run far ahead of fundamentals.
“Some segments like defence-related stocks which have run far ahead of fundamentals are witnessing corrections,”according to Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
After observing the recent performance, will the defence sector based mutual funds continue to perform in similar fashion or will offer good returns? What is the outlook for these funds or sector?
Commenting on the performance of Defence, shipbuilding stocks, Daljeet Kohli, Roha Asset Managers LLP told ET Now, “in these stocks I would say they are valued much ahead of the time. So, whether party is over or not it will depend upon this theme how much it continues or if the liquidity continues to come in and people find that this is an area where it is a sunrise industry, so much of growth is there and so much of potential. We all believe in all of those things. But the point is that at what valuation are you entering. So, if somebody had entered one year, two years back as you said rightly at that time it was something which was undervalued but you have paid probably for the growth of next five years in most of these stocks.”
She also added, “So, the only way to get to the rational valuation would be the time correction. So, in any case we are not invested in any of these stocks and in fact we do not advocate also getting into these stocks even after 20% correction because we believe that they are valued much ahead of the time. They are all good companies, they will keep performing but you have already paid them for the next four-five years of performance.”
We considered all defence sector based mutual funds available for investment. We considered regular and growth options. We calculated returns for the last month.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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