This defence mutual fund yielded 85% return since inception. Time to make allocation in this sector?

HDFC Defence Fund, the only active mutual fund based on the defence sector, has offered 85% return since its inception. Launched in June 2023, the scheme manages assets of Rs 3,952 crore.

In the last one year, the scheme has offered 76.03% return and around 32.61% return in the last six months. The scheme is benchmarked against Nifty India Defence - TRI which gave 100.96% return in the last one year and 46.36% return in the last six months.



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Are you wondering what factors helped this fund deliver such a stellar performance?

“The fund has benefited from a strong rally in the defence stocks over the past year or so on the back of robust order book and significant increase in the defence exports. The sector has also benefited immensely by the government's increased defence spending with focus on indigenization and modernization,” said Nilesh D Naik, Head of Investment Products, Share.Market

In July, Motilal Oswal Nifty India Defence Index Fund was launched after which Aditya Birla Sun Life Nifty India Defence Index Fund and Motilal Oswal Nifty India Defence ETF were launched in August.

There are currently four funds based on the defence sector which are available for investment. Out of these four funds, two funds have completed one month of existence. The performance of these two funds has been on the negative side. Motilal Oswal Nifty India Defence Index Fund and HDFC Defence Fund sector gave negative returns of around 5.73% and 0.85% respectively in the last one month.

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Should one allocate money to defence sector based funds considering the recent correction in most of the stocks in this sector?

“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.

Groww Mutual Fund which has also filed the draft with Sebi to launch a passive fund based on defence sector has till now not launched its fund.

A monthly investment of Rs 10,000 since the inception of the HDFC Defence Fund would have been Rs 2.25 lakh now with an XIRR of 78.65%. A lumpsum investment of Rs 1 lakh since the inception of the fund would have been Rs 2.19 lakh now with a CAGR of 85.13%. Based on yearly returns, the scheme offered 52.05% return in 2023.

With mutual funds focusing more on this sector, what is the outlook for this defence sector?

“Funds with such narrow themes shouldn’t 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 such sectors and narrow themes based on their views,” commented Naik.

(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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