The HDFC Defence Fund is the most recent of India’s mutual fund schemes, which was established in the middle of this year (2023) by HDFC Asset Management Company. This scheme aims at investing in the equities as well as equity-related securities which are in the long run defensive and defense allied sectors, to benefit from the growth phase of the country’s defense industry. Due to the focus that the government of India is placing on Make in India in defense manufacturing and modernization, this particular fund has gained a lot of interest as it has delivery potential and is thematic in nature.

Therefore, let’s have a more detailed explanation regarding the fund structure, purpose, results achieved and factors that every potential investor should take note of.

Fund Overview and Objective

HDFC Defence Fund, an open-ended thematic fund, was launched on 2nd June 2023, intended to comply with the strategic plan of the Government of India for making the country self-reliant in the defense production sector. The Fund predominantly invests in defense-focused commerce, which includes defense industries, service providers, and maintenance contractors, with investments in some other allied industries as well. The objective of this Fund is to provide capital gains to its investors through worth holding in this segment, which the fund anticipates will be useful as the country enhances its defense spending along with its defense exports. 

In terms of the investment strategy of the Fund, the performance of the Nifty India Defence TRI, which comprises the Indian defence industry, is the closest reference point available to the investors looking at the defence segment of the market.

Investment Strategy and Portfolio Composition

The HDFC Defence Fund utilizes a sector-based top-down strategy in analyzing potential sectors for investment, stock picking employs a bottom approach by selecting stocks of companies with sound fundamentals and clear growth trajectories. The fund’s equity allocation as of September 2024 is close to 97.67% with the exception of a small cash holding. The main equity positions are in large corporations such as Bharat Electronics Ltd, Hindustan Aeronautics Ltd, Solar Industries India Ltd, Cyient DLM Ltd and BEML Ltd. These firms cover different segments of the defense sector such as electronics, aerospace and engineering.

Performance and Returns

The HDFC Defence Fund, since its inception, has demonstrated performance metrics that have an average annual return of around 70% and beat quite a number of other thematic funds within this category. For the 1-year period ending October 2024, the fund generated 75.23%, supported by strong growth in the sector owing to increased government spending on defense and emphasis on self-sustainable manufacturing.

As of late October 2024, the NAV of the scheme was reported to be ₹21.33 for the direct growth option. In view of the high returns that this fund offers, it has shown to be a suitable option for investors with a high-risk appetite seeking growth in a specific sector such as the Defense sector in India.

Expense Ratio and Charges

The HDFC Defence Fund’s expense ratio is 0.76% for direct plan and 1.89% for regular plan, which is normal for thematic mutual funds pertaining to sectors. One should also factor in this expense ratio as it is concerned with the management fee and other operating costs which in turn affect the investment return. 

In addition, there is an exit load of 1% on the fund if investment is redeemed before one year from the date of investment, which encourages investors to stay in the investment for a long period of time. This feature is consistent with the fund’s aim of investing for the long term when the growth of the defense sector, which is the sector of investment, is anticipated to take place in the coming years. 

Sectoral Outlook: Why the Defence Sector?

India’s defense sector is on an upward trajectory, supported by ambitious government policies and a burgeoning demand for defense modernization. The “Atmanirbhar Bharat” (Self-Reliant India) initiative has prioritized domestic manufacturing, and the government aims to increase defense exports while minimizing imports. This shift is anticipated to result in robust growth opportunities for Indian companies that supply goods and services to the armed forces.

The Indian government has allocated over $70 billion for defense spending in recent budgets, with a substantial portion aimed at local procurement. As a result, companies within this sector are likely to benefit from stable demand and long-term contracts with the government.

Risks and Considerations

Putting money into the HDFC Defence Fund involves several risks associated with thematic and sectoral funds:

Increased Level of Risk: Being a sectoral fund, the performance of the HDFC Defence Fund is highly dependent on the health of the defense sector and its policies. Even a little shift in government’s expenditure or rising tensions in the political scenario may put the fund at great risk.

Concentration Risk: The fund provides intensive investment in defense-related equities, thus limiting risk spreading. This may enhance risk exposure when compared to other fund types, like mutual funds, that are more diversified.

Economic Sensitivity: Funding of defense forces and other related activities usually fluctuate depending on the economic state. When the economy is on a downward spiral, the government could engage in cutbacks hence reducing available cash for the fund, which in turn impacts profits.

Ideal Investor Profile

HDFC Defence Fund is appropriate for investors who:

  • Do not shy away from moderately high risk with the promise of commensurate rewards.
  • Bear in mind the long term more than five years of investment abstinence from any sectoral volatility.
  • Want to invest in defence and related areas.
  • Wish to invest in domestic corporations for the higher self-reliance and national security of India.

Comparative Analysis and Peer Funds

HDFC Defence Fund is one of the few funds focused on the defence sector. Investors, nevertheless, may instead consider it against other thematic funds such as infrastructure or capital goods funds since they tend to have the same growth drivers. On the other hand, most other funds do not have the singular focus on defence and the conducive policies to support it, hence the HDFC Defence Fund stands out.

Thesis of the invest-following her under the HDFC Defence Fund in investment HDFC Asset Management: HDFC Infrastructure fund, HDFC Small Cap Fund are also growth sector funds, but within them do not have any thematic aspect of HDFC Defence Fund.

Investment Process and Minimum Requirements

For systematic investment plans (SIPs), investors may commence their HDFC Defence Fund investments with a nominal amount of ₹100 and similar one time investments through direct or regular plans. Investment can be made through HDFC website, third party platforms or financial advisors.

Moreover, the fund can also be positioned in the portfolios as a small yet concentrated bucket, especially for investors who are looking to spread risk across various themes and sectors.

Conclusion: Is the HDFC Defence Fund Right for You?

The HDFC Defence Fund is a worthy investment for those who want to invest in the growing defense sector of India. The fund targets long-term capital gains since its inception and has delivered some good returns owing to the positive policy environment and increased spending.

On the other hand, because of its sector focused nature, it is not great as the sole investment but rather as a complimentary investment. All prospective investors must take into consideration their risk appetite and the timeframe for which the investment will be locked, this is because the fund is vulnerable to the fluctuations and the regulatory factors of the defense sector that may affect the fund’s returns in the near term.

Thus, remaining updated with the news related to the defense sector and the HDFC Defence fund’s portfolio will allow investors to take advantage of this unique opportunity presented by the growing demand for defense in India.

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