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Time of India
02-07-2025
- Business
- Time of India
Defence mutual funds gain up to 39% in 3 months. Should you join the rally or stay cautious?
Live Events Defence sector based mutual funds have delivered stellar returns in the past three months, with some schemes offering gains of up to 39%. The average return for the category stands at a strong 36.98%. Around six funds in the category have marked their presence in the market in the said time period. Motilal Oswal Nifty India Defence ETF offered a gain of 38.58% in the last three months, followed by defence funds of Groww Mutual Fund. Groww Nifty India Defence ETF and Groww Nifty India Defence ETF FOF offered a return of 38.48% and 38.32% respectively in the similar time the said time period, defence based two index funds - Motilal Oswal Nifty India Defence Index Fund and Aditya Birla SL Nifty India Defence Index Fund posted a return of 38.27% and 38.21% respectively. HDFC Defence Fund , the only actively managed fund based on the defence sector, posted a return of 30.04% in the same time believe that the sharp rally in the sector was driven by several factors such as rising government expenditure on defence modernisation, supportive policies like Make in India, Atmanirbhar Bharat and increase in geopolitical Palve, Director at Anand Rathi Wealth Limited is of the opinion that the sector remains very sensitive to geopolitical events and similar sharp rallies have occurred in the past usually followed by phases of consolidation or corrections as the sentiment cools off.'Given this volatility, investing in sectorial/thematic funds is not recommended as it requires tactic entry & exit to ride the performance which is not suitable for regular investors,' Palve shared with similar opinion, Sagar Shinde, VP Research, Fisdom told ETMutualFunds that PSU defence companies like HAL, BEL, and BDL have reported healthy order books, margin expansion, and earnings growth. 'Additionally, heightened geopolitical tensions have further increased interest in the sector, both domestically and globally, fueling investor optimism,' Shinde funds have demonstrated similar performance in the last six months as the funds offered up to 39% return with an average return of 35.29%. Motilal Oswal Nifty India Defence ETF offered a gain of 38.73% in the last six Read | JioBlackRock Overnight Fund opens for subscription. Who should invest? Motilal Oswal Nifty India Defence Index Fund delivered a return of 38.24% in the last six months. Groww Nifty India Defence ETF FOF and HDFC Defence Fund gained 36.60% and 21.94% respectively in the last six analysing the past performance of these funds, Shinde said that given the sharp rally, the current valuations appear stretched, making a large lumpsum entry risky and investors with a high-risk appetite and a 3–5 year horizon may consider selective the other hand, Palve while cautioning the investors said that one should keep in mind that investing in the defence sector, or any sectoral/thematic strategy, comes with its own set of challenges as these sectors often experience cyclical performance and require timely entry and exit to capitalise on momentum, which can be difficult for most investors to navigate, therefore, chasing current momentum in such sectors is not of six available funds based on the defence sector, five are passive funds whereas only one is active funds and with passive funds delivering stellar performance compared to active funds, Shinde mentions that, 'Passive funds are preferred, as they have consistently outperformed active peers by a wider margin and also have a better cost advantage. To manage timing risks, a staggered SIP approach is more prudent than a lumpsum investment.'According to a report by ETMarkets, recently defence stocks witnessed a surge after NATO allies agreed to hike defence spending and the move is being seen as a big export opportunity for Indian defence firms.'In a five-point statement issued on Wednesday, NATO leaders backed the big increase in defence spending that US President Donald Trump had demanded, and restated their commitment to defend each other from attack after a brief summit in the Netherlands,' the report Read | Beyond JioBlackRock: Eight other mutual fund NFOs open for subscription this week The further highlighted that the new spending target - to be achieved over the next 10 years - is a jump worth hundreds of billions of dollars a year from the current goal of 2% of GDP, although it will be measured differently and countries have pledged to spend 3.5% of GDP on core defence - such as troops and weapons - and 1.5% on broader defence-related measures such as cyber security, protecting pipelines and adapting roads and bridges to handle heavy military an increase in investor confidence in the sector and hike in defence spending, the experts caution investors with short term volatility in the sector due to stretched valuations and potential profit believes that the investors should enter with calibrated expectations and a long-term mindset. 'The medium to long-term outlook remains constructive, supported by strong policy tailwinds, increasing defence exports, and greater focus on self-reliance. However, short-term volatility cannot be ruled out due to stretched valuations and potential profit booking. Investors should enter with calibrated expectations and a long-term mindset,' he mentioning that the sector has potential to move higher supported by favourable government policies and long-term capital commitments, Palve advises investors not to focus solely on any one sector rather focus on broad-based diversified equity funds.'Looking ahead, the defence sector has the potential to move higher, supported by favourable government policies and long-term capital commitments. However, current valuations suggest the sector appears overheated, with a high degree of froth. This shows that the optimism around future positive events such as order wins, export growth and policy tailwinds may already be priced in. Hence, a phase of mean reversion would not be surprising,' Palve commented.'Thus, it is not advisable for investors to invest solely in any single sector, as it increases the concentration risk. Instead they are recommended to invest in broad based diversified equity funds such as market cap based funds and strategy-based funds which gives exposure across sectors,' he or sector schemes invest most of their corpus in a particular sector, and the performance of schemes is based on performance of the sector. That is why thematic or sector funds are recommended only to investors with thorough knowledge about the should invest in these schemes only if you have a long investment horizon or have intimate knowledge about the sector to time the entry and exit in these schemes. Remember, every sector or theme can go out of fashion depending on the economic conditions. You should not make hasty decisions in those phases.: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)If you have any mutual fund queries, message on ET Mutual Funds on Facebook/Twitter. We will get it answered by our panel of experts. Do share your questions on ETMFqueries@ alongwith your age, risk profile, and Twitter handle.
Economic Times
28-05-2025
- Business
- Economic Times
Defence sector based mutual funds rally up to 60% in 3 months. Will the momentum continue?
Defence sector based mutual funds have rallied upto 60% in the last three months. There are around six funds in the category including active and passive and gave an average return of 57.70% in the same period. Three schemes in the category gave over 60% return. Motilal Oswal Nifty India Defence ETF offered the highest return of around 60.49% in the last three months, followed by Motilal Oswal Nifty India Defence Index Fund which gave 60.23% return in the same period. Also Read | Defence ETFs gain 17% in one week. Should you add to your portfolio? Groww Nifty India Defence ETF and Aditya Birla SL Nifty India Defence Index Fund gave 60.12% and 59.96% returns respectively in the similar time period. Groww Nifty India Defence ETF FOF gave 59.45% return in the mentioned time period. HDFC Defence Fund, the only active fund based on the defence sector, delivered 45.93% return in the mentioned period. Experts attribute this surge to a combination of strong earnings delivery by the sector constituents, policy momentum with increased capital allocation by the Indian government and trigger coming from actual use case of India's Defence Capability in recent India-Pakistan faceoff at borders.'Key holdings in defence index funds reported strong earnings growth. The Indian defence budget allocation for FY25 has maintained a sharp focus on indigenization. Capital outlay of Rs 1.72 lakh crore continues to support new orders. Defence exports reached an all-time high of Rs 21,083 crore in FY24 (up 12% YoY), reflecting rising global demand for Indian defense manufacturing. This surge in earnings, coupled with a policy push and a favorable geopolitical backdrop, led to substantial price rerating and fund outperformance,' said Atul Shinghal, Founder and CEO, Scripbox. In addition to these factors, another expert adds that Defence funds have benefited from the recent surge in prices of defence stocks. Defence stocks have been on the rise in recent months after they were hit badly during the sell-off earlier this year. 'Many countries around the world, including India are ramping up their military capabilities, leading to increased defence spending. In India, this trend was further strengthened post the Operation Sindoor, as the Indian government plans to further improve our defence capabilities,' said Nilesh D Naik, Head of Business – Investments, the last six months, defence based passive funds returned 34% with Motilal Oswal Nifty India Defence ETF being the topper as the fund delivered 34.22% return in the last six months, followed by Motilal Oswal Nifty India Defence Index Fund which gained 33.73% in the same Nifty India Defence ETF FOF gave 33.35% in the last six months. HDFC Defence Fund, the only active fund based on this sector, gave 15.86% return in the same period. Also Read | HDFC Defence Fund increases stake in HAL, Solar Industries, and 4 other stocks in April Despite seeing the historical stellar performance by these funds, experts don't recommend investing in these sectoral funds. Shinghal of Scripbox mentions that despite strong sector fundamentals, current valuations are stretched as the trailing P/E ratio of the Motilal Oswal Nifty India Defense Index stands at a steep 61.35x, while the P/B ratio is 13.22x—significantly higher than broader market averages. which in turn indicates that the future growth might be already priced further adds that the Sharpe Ratio is negative (-0.07), indicating poor risk-adjusted return over recent volatility, despite high absolute returns and the index has 77.5% exposure to mid and small caps, which increases vulnerability to sharp corrections during risk-off sentiment willing to allocate or have existing investments in these funds can follow the strategy Shinghal shared. He mentioned that existing investors should hold and consider profit booking in a staggered manner, new investors should avoid fresh lump-sum allocations and tactical SIPs may be considered only on 10–15% corrections, and lastly the total allocation to defence sector should be between 2-4% and should not exceed 4% of total equity the other hand, Naik advices that thematic funds such as this are typically meant for seasoned investors who have their core portfolio in place and who want to take a tactical bet based on their views on a specific sector or theme. 'With recent rally in defence stocks, many of them have now recovered significantly and are trading at close to their all time highs. While the long term defence sector story seems strong, investors should be extremely cautious while investing in such funds post this rally, given the current valuations,' he earlier analysed that in a week's time, defence sector based ETFs have gained upto 17% in one week's time. The focus on defence stocks came after reports that the Modi government has called a meeting with defence makers post the recent India-Pakistan faceoff at the stellar performance of defence funds, Shinghal comments on the outlook for the sector and mentions that while India's long-term defense growth story is intact, current valuations do not offer a favorable risk-reward for fresh allocations and investors are advised to retain moderate exposure (up to 4%), book profits where returns have exceeded expectations, and re-enter during valuation corrections or policy-driven should always choose a scheme based on risk appetite, investment horizon, and goals. (Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times) If you have any mutual fund queries, message on ET Mutual Funds on Facebook/Twitter. We will get it answered by our panel of experts. Do share your questions on ETMFqueries@ alongwith your age, risk profile, and Twitter handle.
