HDFC Defence Fund on offer for investors. Is it worth your money? 3 experts weigh in

HDFC Mutual Fund has come out with a new HDFC Defence Fund offer. The idea behind launching this fund is to earn long-term capital appreciation by investing predominantly in equity and equity-related securities of Defence & allied sector companies.

The newly launched defence fund is currently the only one in its category. The HDFC Mutual Fund house wishes to optimize the growing need for defence-focused funds as India enters the era of self-reliance in the defence sector.

In recent years, India's efforts to achieve defence self-sufficiency have gained traction, with an emphasis on lowering reliance on imports and boosting indigenous defensive capabilities. The implications on the defence sector are palpable, which is why many investors may deem it a unique investment opportunity in the defence sector.

Hailed as a bold and unprecedented category in the realm of mutual fund investments, investors are curious about its investments and growth prospects. They wish to know if they can or must delve into the potential for defence-focused mutual funds. Also, since it is a new fund offer (NFO), is it worth putting money in this fund? Many personal financial experts do not favour NFO investments, though it still makes sense to inquire if there is an exception to this thumb rule with a fund category in place.

Dev Ashish, Founder, Stable Investor said, “While the theme of the NFO looks potentially good and glamorous, given the government’s intent to ramp up defence spending, it must be understood that this is a high-risk thematic strategy. These are thematic high-risk strategies. Given your risk profile, I think our investment requirements are sufficiently met via existing diversified funds and we don’t need any sectoral or thematic funds. Also, the investible universe of the fund (given its very specific defence orientation) is limited to 21 companies as per AMC’s presentation. And 18 out of 21 are small-caps. So, this is clearly going to be a risk fund from a market cap orientation perspective and volatility might be very high.”

Irrespective of the category, Rishabh Parakh, Chief Play Officer, NRP Capitals echoes his views against putting money in sectoral funds. He said, “Never invest in a sectoral fund unless you are doing it based on your risk profile. Sectoral funds come with a high risk-reward proposition and timing the exit if you make a good profit when the sector outperforms. It is extremely important apart from having the patience to stay silent when the sector remains stagnant for years together.”

Assuming that investors are willing to take risks in this thematic category, how long must one stay invested? This is an important question, especially, for new-age investors who cannot wait to see returns within a few months of investing their money.

Preeti Zende, Founder, Apana Dhan Financial Services explained, “Those who have excess money and have the appetite to take higher risk can think of investing in this fund as Government is keen on spending on infrastructure and defence. But a long-term view is needed in these kinds of investments as such companies are capital-oriented and grow at a steady level in the long run.”

Given how India is slowly focusing on enhancing its defence production, does it make sense for investors to include this fund in their investment portfolios? This fund can be a great choice though investors must not suddenly jump in to put their money in it now. 

It is advisable to sit back and wait to see how a particular fund performs. There are myriad factors beyond the fund category that must be looked into like expense ratio, portfolio turnover, effect of market volatility, and others. For now, the motto should be “Just wait and watch before deciding on your next move”.