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Motilal Oswal Nifty Defence Index Fund: should you invest?

This article discusses the NFO of the Motilal Oswal Nifty Defence Index Fund which is the second fund tracking the Nifty Defence Index.

Motilal Oswal Nifty Defence Index Fund: should you invest?


Posted on 15 Jun 2024
Author: Sayan Sircar
11 mins read
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This article discusses the NFO of the Motilal Oswal Nifty Defence Index Fund which is the second fund tracking the Nifty Defence Index.

Motilal Oswal Nifty Defence Index Fund: should you invest?

Disclaimer: Image from the Motilal Oswal website is used for representational purpose only.

This article is a part of our detailed article series on new fund offerings (NFOs) in India. Ensure you have read the other parts here:

๐Ÿ“š Topics covered:

What are the details of this NFO?

Motilal Oswal Asset Management filed a draft application with SEBI for an index (passive) mutual fund tracking the Nifty Defence Index in May 2024.

This fund is an index fund that passively tracks the Nifty Defence Index. The Nifty Defence Index is an index (like the SENSEX or Nifty 50) tracking stocks from the defence theme.

As per the NSE website:
The index aims to track the performance of a portfolio of stocks that broadly represent the Defence theme.

The NFO period for this fund was from 13-Jun to 27-Jun 2024.

What is the performance of the Nifty Defence Index?

Here is how the index performed versus the Nifty 50 (rebased to 1000 and starting from April 2018) on certain milestone dates:

Date Nifty 50 Index Nifty Defence Index Comments
Apr-18 1,000.00 1,000.00 Launch of Nifty Defence Index
Aug-22 1,717.69 1,717.16 Catches up to Nifty 50
Jun-23 1,829.91 2,429.14 HDFC Defence fund launched
Nov-23 1,919.71 3,398.67 Doubles in 15 months
May-24 2,267.65 6,559.43 Doubles in 6 months
Jun-24 2,310.23 6,740.42 Up 6.74x since launch

As we can see, the index is up 6.74 times since its launch in April 2018 and has become 4 times since August 2022. When we look at the performance versus the Nifty 50, the broad-market Nifty 50 appears stalled relative to this index, especially after the outperformance (Nifty 50 being better up to the red oval) until August 2022.

Performance of Nifty Defence Index vs. Nifty 50 index

Related:
The NIFTY Defence Index has risen more than 6x in 6 years. Should you invest?

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Where is the return coming from for the Nifty Defence Index?

According to the May 2024 index Factsheet, the index holds these stocks:

Row # Stock Weight (%)
1 Hindustan Aeronautics Ltd. 21.69
2 Bharat Electronics Ltd. 20.72
3 Solar Industries India Ltd. 13.9
4 Bharat Dynamics Ltd. 9.16
5 Cochin Shipyard Ltd. 8.87
6 Mazagoan Dock Shipbuilders Ltd. 6.18
7 Astra Microwave Products Ltd. 4.69
8 Data Patterns (India) Ltd. 4.57
9 Garden Reach Shipbuilders & Engineers Ltd. 2.62
10 MTAR Technologies Ltd. 2.24
11 5 additional stocks 5.36
12 Total 100.00

Thus, this index is primarily influenced by these 5 stocks, which account for more than 74% of the weight:

Stock Weight (%) 6M return 1Y return Since 4th June 2024
Hindustan Aeronautics Ltd. 21.69 -5.72% 3.24% -0.30%
Bharat Electronics Ltd. 20.72 83.14% 147.28% 18.92%
Solar Industries India Ltd. 13.9 43.29% 156.36% 8.66%
Bharat Dynamics Ltd. 9.16 3.16% -15.93% -2.73%
Cochin Shipyard Ltd. 8.87 237.44% 632.91% 25.99%

The complete list of stocks, available here, is:

Company Name Industry Symbol
Astra Microwave Products Ltd. Capital Goods ASTRAMICRO
Bharat Dynamics Ltd. Capital Goods BDL
Bharat Electronics Ltd. Capital Goods BEL
Cochin Shipyard Ltd. Capital Goods COCHINSHIP
DCX Systems Ltd. Capital Goods DCXINDIA
Data Patterns (India) Ltd. Capital Goods DATAPATTNS
Garden Reach Shipbuilders & Engineers Ltd. Capital Goods GRSE
Hindustan Aeronautics Ltd. Capital Goods HAL
Ideaforge Technology Ltd. Capital Goods IDEAFORGE
MTAR Technologies Ltd. Capital Goods MTARTECH
Mazagoan Dock Shipbuilders Ltd. Capital Goods MAZDOCK
Mishra Dhatu Nigam Ltd. Capital Goods MIDHANI
Paras Defence and Space Technologies Ltd. Capital Goods PARAS
Solar Industries India Ltd. Chemicals SOLARINDS
Zen Technologies Ltd. Capital Goods ZENTEC

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Are there other funds which track the Nifty Defence Index?

Before Motilal launched the NFO, there was only one fund that tracked this index: the HDFC Defence fund, active since June 2023. This is an expensive fund with an expense ratio of 0.74 for the direct fund (at the time of publishing).

We present the performance of the HDFC Defence fund versus the Nifty Defence Index and the Nifty 50 Index below for the closing NAV of 13-Jun-2024:

Date Nifty 50 Nifty India Defence HDFC Defence Fund
04-Jun-24 (election results) 6.92% 14.87% 16.78%
15-Jan-24 (6M) 5.89% 55.79% 42.85%
02-Jun-23 (since launch) 26.25% 177.48% 127.70%

The HDFC Defence fund is not an index fund and does not track the underlying Nifty Defence Index precisely.

As of the time of writing, this fund is only allowing SIP and no lump sums due to an excess of inflows making it difficult to deploy fresh capital into just these few stocks. If someone wishes to invest a lump sum into stocks tracking the Nifty Defence Index, the Motilal Oswal Nifty Defence Index Fund is the only way to do it.

Who should invest in the Motilal Oswal Nifty Defence Index Fund?

โ€œInvestors should remember that excitement and expenses are their enemies.โ€ - Warren Buffett

An investor who ticks one or more of the boxes below might consider investing:

โ˜‘ A keen follower of the Defence sector news and companies

โ˜‘ Willing to invest a substantial portion of the portfolio (say 5% or more) as a satellite portfolio: What is a core-satellite portfolio and when can you use it?

โ˜‘ Would understand the inherent risks of theme-based investing

โ˜‘ Has research-based conviction on the entry and exit points for this theme

โ˜‘ Understands that thematic funds have tendencies of a sudden reversal that can wipe out all gains

Who should not invest in the Motilal Oswal Nifty Defence Index Fund?

An investor who ticks one or more of the boxes below should not invest:

โ˜‘ Interested in this theme now that the index (and funds) exist

โ˜‘ Attracted by the recent high returns of this theme

โ˜‘ Has not done due diligence beyond reading about this index and funds online

โ˜‘ Will be investing a very small amount or will start a small SIP. Both indicate a lack of conviction and lead to portfolio clutter: How to clean up your mutual fund portfolio?

โ˜‘ Disagrees with the Warren Buffett quotation above

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This post titled Motilal Oswal Nifty Defence Index Fund: should you invest? first appeared on 15 Jun 2024 at https://arthgyaan.com


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