While the gunshots across Ukraine’s Dnipro River are yet to fade away, news of fresh hostilities is coming in from the Israel-Gaza border. Perhaps Bob Dylan was right, peace is the time it takes to reload a rifle. The sad reality of life is that even after thousands of years of existence, humans have not yet learned how to live peacefully.
Although offence is the reality, defence is more of a necessity. Most countries spend a fortune on their defence budget and hope to secure their borders and sovereignty. These expenses are meant to avoid war, not wage one. But these expenses also mean a higher revenue for global defence majors like Lockheed Martin, Northrop Grumman, General Dynamics and many others.
Many of these defence companies are listed in the stock market and are a part of many mutual fund schemes. In the US market, the Fidelity Select Defense and Aerospace Fund is a four-decade-old fund with nearly 13% annual average return in the last ten years.
India’s defence expenditure is the third highest in the world, behind the USA and China. The government increased defence expenditures in this year’s Union Budget by 13%. During the last financial year, India’s defence turnover surpassed Rs 1 trillion for the first time. The issuance of defence licenses has increased in India by 200% in the last seven to eight years. Ambitious targets are in place in the Indian defence sector, as the government emphasises Make in India and Atmanirbhar Bharat goals.
With these promising developments as the backdrop, it can be expected that Indian defence companies will prosper in the coming years. HDFC Bank launched a sectoral/thematic fund scheme this year, that focuses exclusively on defence stocks.
With the fund in existence only since June 2023, we have a limited time frame to review its performance. The fund has generated 19% growth since inception, with your day 1 investment of Rs 10,000 presently standing at Rs 11,902.
The scheme has a 96.5% allocation in equities and 3.5% in TREPS. Of the top 10 allocations made by the scheme, five are in defence and aerospace stocks, while two are in explosive manufacturing companies. Top allocations include Hindustan Aeronautics (HAL), Bharat Electronics (BEL), Solar Industries, MTAR Technologies and Astra Microwave.
Long-term capital gain of more than Rs 1 lakh on this type of scheme attracts a 10% income tax. If sold within a year of purchase, a short-term capital gain tax of 15% is applicable.
The scheme has a small fund universe of 21 stocks, 18 of which are small-cap and 13 are private sector stocks. It is a highly volatile sector where the Nifty India Defence Index has generated 49% and 63% returns in the last 12 and 36 months respectively.
Apart from this scheme, other mutual funds with high defence stock exposure include 360 ONE Quant Fund, ITI Midcap Fund, Edelweiss Midcap Fund, Kotak Emerging Equity Fund and Tata Dividend Yield Fund.
The rapidly growing defence stocks are a part of many other schemes, although not as exclusively as the HDFC Defence Fund. However, sectoral funds are highly risky and volatile. You should invest in this fund if you are positive about India’s expected defence success story, and have a strong understanding of the sector and its influencing factors.
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