 "Motilal Oswal launches India's first Defence Index Fund: Should you invest?")
With India's defence sector experiencing explosive growth fueled by government initiatives and a burgeoning order book, Motilal Oswal Asset Management Company (MOAMC) has launched a timely investment opportunity: the Motilal Oswal Nifty India Defence Index Fund. This is the second such fund in the country, following HDFC launching their own variant last year.
Riding the defence wave:
This open-ended fund marks the second such offering in India, following HDFC's launch last year. However, the Motilal Oswal fund takes a unique approach - it's a passive fund that tracks the Nifty India Defence Index. This means the fund's performance is directly tied to the performance of the index, offering investors a convenient way to gain exposure to the entire Indian defence sector.
The Nifty India Defence Index Fund tracks the performance of the Nifty India Defence Index. This is an index of the top companies in the Indian defence sector. The fund offers investors with an opportunity to gain exposure to the defence sector through a diversified passive portfolio of pure defence stocks.
The Nifty India Defence Index Fund tracks the performance of the Nifty India Defence Index. This is an index of the top companies in the Indian defence sector. The fund offers investors with an opportunity to gain exposure to the defence sector through a diversified passive portfolio of pure defence stocks.
Subscription Window Open:
The Motilal Oswal fund will be open for subscription until June 27, 2024.
Since Motilal Oswal Nifty India Defence Index Fund is an index fund, it will replicate the Nifty India Defence Total Return Index (TRI) to generate returns. Launched on January 19, 2022, the Nifty India Defence Index TRI is home to 15 companies that broadly represent the defence sector. Of these, the top 10 comprise around 94 per cent of the portfolio. The weight of each stock in the index is based on free-float market capitalisation and is adjusted every six months (March and September).
Over the 1 year and 3-year CAGR, of Nifty India Defence Index has been 177% and 89.5% respectively as of end of May 31, 2024. While Defence exhibits strong performance potential, it may also experience higher volatility.
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The Nifty India Defence Index has delivered impressive returns, reflecting the increased government focus on domestic defence manufacturing. This focus is evident in initiatives like "Atmanirbhar Bharat" (Self-Reliance), which aims to reduce dependence on imported defence equipment and boost domestic production.
High-risk fund
According to brokerage IIFL, this is a high risk fund for investors. The primary risk here is the sector-specific risk since the fund performance will closely track the defence sector; and many of them are quoting at steep P/E ratios. Government priorities may change, when it comes to in-sourcing and there could also be liquidity related risks since many of these stocks do not have institutional level liquidity.
"You should ideally be an investor who is seeking exposure to a high-growth sector with strategic importance and diversifying your portfolio away from regular cycles. The growth in defence is a mix of national priorities and technology. Hence investors must have patience for 5-7 years, at least, to invest in these themes fruitfully," IIFL said in a note.
Fund managers
Fund managers are Rakesh Shetty and Swapnil Mayekar. Shetty has over 14 years of experience in equity, debt, corporate treasury and banking. Presently, he manages 36 passively managed funds at Motilal Oswal.
Mayekar is Vice President - Fund Manager at Motilal Oswal AMC and has been with the fund house since 2010. He currently manages 23 other passively managed funds, such as the Motilal Oswal S&P BSE Enhanced Value Index Reg-G and Motilal Oswal Nifty Midcap 100 ETF-G.
Exit load: 1 per cent if the units are redeemed within 15 days of allotment. Nil thereafter.
Tax treatment: If the units are sold after a year, 10 per cent tax will be applicable on gains exceeding Rs 1 lakh.
If the units are sold within a year, 15 per cent tax will be levied.
Why Defence?
According to Nomura research, the Defence sector highlights a significant opportunity for India's Defence sector, estimating a pipeline of USD138 bn over FY24-FY32F.
According to market experts, companies in this sector have improved their balance sheets and also their profitability through the continued increase in exports and increase in Defence expenditure by the government. This makes investing in the India Defence Index Fund an attractive investment proposition.
"Most defence companies, many of them government-owned enterprises (PSUs), have seen their stock prices zoom in the last couple of years. The numbers attest to that. The defence index has outpaced the broader market nearly four times based on three-year rolling returns," said Ameya Satyawadi of Value Research.
Prateek Agrawal, MD & CEO of MOAMC, said "India's strides towards self-reliance in defence are creating a fertile ground for innovation and significant growth. Our Motilal Oswal Nifty India Defence Index Fund allows investors to participate in this projected $100 billion to $120 billion expansion in the defence sector over the next six years."
Should you invest in a defence fund?
The HDFC fund has delivered impressive returns exceeding 130% since inception, a dream for many investors. However, there are important considerations before investing, as explained by Value Research's Satyawadi:
Sectoral Risk: Defence funds are inherently sectoral, meaning their performance is heavily tied to the fortunes of the defence industry. Historically, such funds can experience periods of significant boom and bust, exposing investors to volatility.
Potential for Frothy Valuations: While defence spending is on the rise, the recent surge in stock prices raises questions about potential overvaluation. This means investors might be entering at a peak, with limited room for further growth.
"While diversified equity funds such as flexi-cap and multi-cap funds usually invest across various sectors, that's not the case with defence. These funds don't have significant exposure to defence stocks present in the index. Which is why if you are eager to invest in them, you may consider allocating a small portion of your money to a defence fund," noted Satyawadi.