In a bid to capitalize on the growing significance of the defence sector amid rising global tensions. HDFC Mutual Fund has introduced a new offering known as HDFC Defence Fund (HDF).
This New Fund Offering (NFO) commenced on May 19 and will conclude on June 2.
The defence sector has witnessed a surge in demand, prompting companies within this industry to secure numerous orders.
Recognizing this opportunity, HDFC Mutual Fund has unveiled this scheme.
Investment Strategy
HDFC Defence Fund (HDF) will allocate a minimum of 80 percent of its funds towards shares of defence and allied companies.
This includes entities engaged in Defence, Explosives, Shipbuilding, and Allied Services.
Moreover, the fund will also include companies generating a minimum of 10 percent revenue from the defense segment.
Fund Manager
Abhishek Poddar will assume the role of the Fund Manager for this scheme. The performance of the fund will be benchmarked against the Nifty India Defense Index TRI.
The investment strategy will emphasize growth and quality stocks with reasonable valuations.
Over the past few years, the government has expressed its intention to boost domestic defense equipment manufacturing, reducing reliance on imports.
Future Outlook
The government has been increasing capital investment in the defense sector and prioritizing indigenous production to enhance self-reliance.
This strategy is expected to strengthen India’s defense preparedness during challenging times, while also generating employment opportunities.
Additionally, the government aims to export defense equipment to nations with whom India maintains positive relations.
Abhishek Poddar, Fund Manager at HDFC Asset Management Company, commented, “The current share of exports in total revenue is quite low.
India’s contribution to global arms exports stands at a mere 1-2 percent. However, it has grown eight-fold in the last eight years.
Greater emphasis on research and development will enable India to leverage its export potential.”
Risk Assessment
Ravi Kumar TV, Founder of Gaining Ground Investment Services, cautioned that the defense sector is subject to heavy regulation.
The future prospects of companies in this sector largely depend on government procurement decisions.
Changes in government policies, defense budget reductions, and export regulations can impact these companies.
Poddar acknowledged the risk associated with buyer concentration, as the government remains the largest purchaser of defense products.
However, the constant need for upgrades and modernization within the defense forces sustains demand for defense-related products and technologies
, fostering growth for companies in this sector. Poddar also highlighted the potential for companies to explore export opportunities in the future.
Market Landscape
Presently, the defense sector has a limited number of listed companies. Expanding the pool of listed companies is crucial for investors seeking portfolio diversification.
Over the past year (as of May 17, 2023), the Nifty India Defense Index has recorded a remarkable 56 percent return.
As of April 28, 2023, the benchmark index included 13 companies, such as Hindustan Aeronautics and Bharat Electronics, which accounted for around 20 percent allocation each.
Solar Industries, the third-largest company, had an 18 percent allocation. HDFC’s investment universe encompasses a total of 21 companies .
with 80 percent of the fund’s assets to be invested in shares of these entities.
Investment Considerations
Experts recommend caution when investing in this sector solely based on its recent one-year returns.
However, for long-term investors, HDFC Defense Fund (HDF) presents an opportunity. It is advisable for new investors to avoid initiating their investment journey with a sectoral fund.
Instead, those with experience in navigating multiple market cycles and an established core portfolio may consider allocating a small portion of their investments to this fund.
