A strong thrust by the Indian government to modernise its defence forces and push for self-reliance augur well for the long-term growth of the sector, believe analysts.
However, first-time investors or those who have not been through market cycles should stay away from such thematic funds which require timing markets to generate returns.
As geopolitical tensions rise globally, many countries are continuously spending on enhancing their defence capabilities and becoming self-reliant. India too has been increasing its defence spend, introducing new technology and modernising its armaments. Analysts expect spending on defence to be a multi-year theme.
HDFC Defence Fund will follow a multi-cap strategy and build a portfolio with a focus on growth and quality at reasonable valuations by investing across large-, mid- and small-cap stocks.
The fund will have a concentrated portfolio with 80% of the corpus invested in shares of defence and allied sector companies. The scheme will be managed by Abhishek Poddar and the performance of the scheme will be benchmarked against Nifty India Defence Index TRI.
The new fund offer (NFO) is currently open and closes on June 2. The minimum investment amount is ₹100 and there is an exit load of 1% for redemptions before a year.”As India is emerging as an economic superpower, it is important we also become equally capable in defending ourselves and become independent of other nations in our defence requirements. The government has started taking initiatives in this direction, which in turn will lead to high growth in the sector,” said Shital Shah, founder of AG Financial Services.
Given that the space will have a higher number of small-cap companies, Shah recommends investors have a 2% allocation to such a theme in their portfolio.
Defence stocks have been one of the best performers in the last year with the Nifty Defence Index moving up 55%, compared with the Nifty 50 rise of 16.60%. Some stocks in the space like Mazagon Dock and Data Patterns have more than doubled in the last year.
“Valuations are expensive with many defence stocks doubling over the last year and hence investors should stagger their investments using SIPs,” said Chetan Nandani, founder of Prime Care Investments.
Financial planners believe thematic funds work for savvy investors who can time their entry and exit. Retail investors could be disappointed and are better off with diversified equity mutual funds.
“Investors have often piled into these funds at precisely the wrong time mostly following strong past performance, only to be disappointed. Given their non-diversified exposure, higher risk profile, and the need to time both entry and exit, we would suggest avoiding thematic funds and sticking to well-diversified equity funds,” said Arun Kumar, head of research at FundsIndia.
