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With India's defence sector going all guns blazing due to increased government push for localisation and growing order book, it's not surprising that Motilal Oswal AMC is launching a mutual fund focused on investing in defence companies.
This is the second such fund in the country, following HDFC launching their own variant last year.
However, unlike the HDFC fund, Motilal Oswal Nifty India Defence Index Fund is a passive fund that will mimic the defence index.
The Motilal Oswal fund will be open for subscription until June 27, 2024.
At a glance: Motilal Oswal Nifty India Defence Index Fund NFO
| Fund name | Motilal Oswal Nifty India Defence Index Fund |
| SEBI category | Index fund |
| NFO period | June 13-27, 2024 |
| Benchmark | Nifty India Defence Total Return Index (TRI) |
| Fund manager(s) | Rakesh Shetty and Swapnil Mayekar |
| 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. |
About the fund
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).
Performance of the defence index
Increased government focus on defence manufacturing in recent years has been a godsend for the index.
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.
About the fund managers
Rakesh Shetty and Swapnil Mayekar will jointly manage the fund.
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.
Should you invest in a defence fund?
As mentioned earlier, the defence sector, and consequently defence companies, has been on a tear in the last couple of years. HDFC Defence Fund, the first actively managed defence fund, has been a beneficiary, delivering over 130 per cent returns since its inception in May 2023.
While such returns are a dream for any investor, you should consider the following:
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Sectoral risk:
One, defence funds are sectoral in nature. Usually, such funds have taken investors on a white-knuckle ride in the long run, wherein you experience significant periods of boom and bust.
- Frothy valuations: Two, while defence spending has ramped up significantly, the recent surge in stock prices has also put a question mark on their valuation. In other words, many companies' stock prices have become too high for comfort.
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.
Also read: Ask these three questions before investing in an NFO
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