Motilal Oswal Asset Management Company (MOAMC) has introduced the Motilal Oswal Nifty India Defence Index Fund, a timely investment opportunity for India's defence sector, which is witnessing accelerated growth due to government efforts and a growing order book. This is the country's second such fund, with HDFC establishing their own variation last year.
Riding the Defensive Wave:
This is the second open-ended fund offered in India, following HDFC's introduction last year. However, the Motilal Oswal fund takes a different strategy, as it is a passive fund that tracks the Nifty India Defence Index. This means that the fund's performance is directly proportional to that of the index, providing investors with a handy approach to obtain exposure to the whole Indian defence sector.
The Nifty India Defence Index Fund measures the performance of the Nifty India Defence Index. This is an index of the top firms in India's defence sector. The fund provides investors with the option to obtain exposure to the defence sector through a diverse passive portfolio of pure defense stocks. The Motilal Oswal fund's subscription window is available till June 27, 2024.
Nifty India Defence Index Fund is an index fund that uses the Nifty India Defence Total Return Index (TRI) to generate returns. The Nifty India Defence Index TRI, which was launched on January 19, 2022, includes 15 businesses that roughly reflect the defence sector. Of them, the top ten account for around 94% of the portfolio. The weight of each stock in the index is determined by its free-float market capitalisation and is changed every six months (March and September).
As of May 31, 2024, the one-year and three-year CAGRs for the Nifty India Defence Index were 177% and 89.5%, respectively. While Defence has excellent performance potential, it may also see increased volatility.
The Nifty India Defence Index has provided strong gains, reflecting the government's increased emphasis on indigenous defense industry. This goal is seen in efforts such as "Atmanirbhar Bharat" (Self-Reliance), which seeks to reduce reliance on imported defense equipment while increasing domestic manufacture.
High-risk Fund
According to brokerage firm IIFL, this is a high-risk fund for investors. The biggest risk here is sector-specific risk, as the fund's performance will closely mirror the defence industry, and many of them are trading at high P/E ratios. Government priorities may shift when it comes to in-sourcing, and there may be liquidity problems because many of these equities lack institutional liquidity.
"Ideally, you should be an investor looking for exposure to a high-growth area of strategic importance while also diversifying your portfolio away from typical cycles. Defense expansion is driven by both national priorities and technological advancements. As a result, investors must be patient for at least 5-7 years to reap the benefits of investing in these themes, according to IIFL.
Fund Managers
The fund's managers are Rakesh Shetty and Swapnil Mayekar. Shetty brings more than 14 years of experience in equities, debt, corporate treasury, and banking. He now oversees 36 passively managed funds at Motilal Oswal.
Mayekar is the Vice President - Fund Manager of Motilal Oswal AMC, where he has worked since 2010. He also oversees 23 other passively managed funds, including the Motilal Oswal S&P BSE Enhanced Value Index Reg-G and the Motilal Oswal Nifty Midcap 100 ETF-G. Exit load is 1% if the units are redeemed within 15 days of allotment. Nothing else happened after that. Tax treatment: If the units are sold after a year, 10% tax will be levied on gains exceeding Rs 1 lakh. If the units are sold within one year, a 15% tax will be charged.
Why Defense?
According to Nomura research, the defence sector represents a substantial opportunity for India's defence sector, with a pipeline of USD138 billion between FY24 and FY32F. Furthermore, as per the market experts, enterprises in this sector's balance sheets and profitability have improved as a result of the government's ongoing increase in exports and defense spending. This makes investing in the India Defence Index Fund an appealing investment opportunity.
"Most defense businesses' stock prices have skyrocketed in recent years, with many being government-owned entities (PSUs). The numbers back this up. According to Value Research's Ameya Satyawadi, the defence index has beaten the broader market by roughly four times over the last three years.
According to Prateek Agrawal, MD & CEO of MOAMC, "India's efforts to achieve self-reliance in defense are laying the groundwork for tremendous growth and innovation. Our Motilal Oswal Nifty India Defence Index Fund enables investors to participate in the defense sector's estimated $100 billion to $120 billion increase over the next six years."
Should you invest in a defense fund?
Since its inception, the HDFC fund has delivered returns of more than 130%, which is a dream come true for most investors. However, there are significant concerns before investing, as demonstrated by
Satyawadi of Value Research says:
Sectoral Risk: Defense funds are fundamentally sectoral, which means their performance is significantly influenced by the fortunes of the defense industry. Historically, such funds have seen periods of tremendous boom and bust, exposing investors to volatility.
Potential for Frothy Valuations: While defense spending is increasing, the current jump in stock prices raises concerns about possible overvaluation. This suggests that investors may be entering at a peak, with little room for future expansion. "While diversified equities funds, such as flexi-cap and multi-cap funds, typically invest across multiple sectors, this is not the case for defense. These funds have little exposure to the index's defence stocks. As a result, if you want to invest in them, you should consider putting a modest amount of your money into a defense fund," Satyawadi said.
