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

This article discusses the blistering performance of the Nifty Defence index and how much defence stocks have beaten the broad market since its launch.

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


Posted on 14 Jun 2024
Author: Sayan Sircar
15 mins read
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This article discusses the blistering performance of the Nifty Defence index and how much defence stocks have beaten the broad market since its launch.

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

This article is a part of our detailed article series on specific indices in India. Ensure you have read the other parts here:

📚 Topics covered:

What is the Nifty Defence Index?

The Nifty Defence Index is an index (like the SENSEX or Nifty 50) tracking the 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.

As per the index Factsheet, the index details are as follows:

Metric Description
Methodology Periodic Capped Free Float
No. of Constituents 15
Launch Date Jan 19, 2022
Base Date April 02, 2018
Base Value 1000
Calculation Frequency End of day
Index Rebalancing Semi-Annually

Why did NSE launch the Nifty Defence Index?

Year NSE Indices
2013 36
2014 38
2015 48
2016 57
2017 69
2018 76
2019 78
2020 77
2021 87
2022 94
2023 104
2024 107

NSE makes money by creating indices and licensing that data to AMCs to launch index funds, ETFs, and other mutual funds tracking the index. It is such a great business that the number of indices published by NSE has increased three times from Jan-2013 to Jan-2024.

As per the index Factsheet, these are the stocks in the Index:

From the Nifty Total Market index, stocks forming part of eligible basic industries or those which obtain at least 10% of revenues from the defence industry are eligible to be included in the index

Under the “ATMANIRBHAR BHARAT INITIATIVE IN DEFENCE PRODUCTION” initiative, the defence sector is currently receiving considerable attention from the Central Government. A stock market index tracking the theme is a logical offering from the NSE.

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Which stocks are in the Nifty Defence Index?

The index has these stocks:

The updated list is here: stocks

How has the Nifty Defence Index behaved in the past?

The Nifty Defence Index was started with a base date of 2nd April 2018 and a starting value of 1000. The performance chart below shows how this index has performed versus the broad market index Nifty 50:

Performance of Nifty Defence Index vs. Nifty 50 index

This index tested the patience of the investors up to August 2022 (see up to the red oval in the chart), underperforming the Nifty 50 consistently, and then went up like a rocket. Investors must study the events that led to this tremendous jump before investing in these stocks.

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

How has the Nifty Defence Index performed in terms of rolling returns and risk?

These rolling charts work on a window basis. Each point on the chart is calculated using a 3-year SIP like this:

  • Point 1: 1st Jan 2020 to 1st Jan 2023
  • Point 2: 1st Feb 2020 to 1st Feb 2023
  • and so on

The data shows that for 3-year SIPs reviewed after April 2021, the new Nifty Defence Index has given a consistently higher return and massive returns vs the Nifty 50.

3-year rolling SIP returns (fixed SIP) for the Nifty Defence Index

Here using the same rolling window concept, we have calculated the standard deviation of the monthly returns using 36 months:

3-year rolling risk for the Nifty Defence Index

Unsurprisingly, the new Nifty Defence Index is consistently more volatile than the Nifty 50 as expected from a basket of stocks with only 15 members and limited sector diversification.

If we summarise the results over the entire 3-year rolling windows:

Index Return Risk
Nifty 50 17.48% 18.71%
Nifty Defence Index 53.55% 28.53%

An important point for all indices with backtested results is that they can be created by tweaking the rules to give great results in the past. Such results may or may not be seen in the future. This particular index did not exist before January 2022 and the entire history since 2018 is only backtested data.

To understand how to use data to understand if this index is good or not:

Also read
Goal-based investing: does it work in India for lump sum investing?

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

As per 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

Therefore, this index is essentially a play on these 5 stocks which have more than 74% 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%

How to invest in the Nifty Defence Index?

You cannot directly invest in an index. You either need:

  • a mutual fund or ETF that tracks the index
  • a mutual fund that buys an ETF that tracks the index (called a fund-of-fund)

If you do not have an index fund or do not wish to invest in an ETF, the next best alternative is to invest directly in the underlying stocks. The current list of stocks is available on this page under “Index Constituent” in the Downloads section.

Is there a Nifty Defence Index fund in India?

There is only one fund that tracks this index: HDFC Defence fund which has been 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).

Motilal Oswal Asset Management has filed a draft application with SEBI for an index (passive) mutual fund tracking the Nifty Defence Index on May 2024. The NFO period for this fund is 13-Jun to 24-Jun 2024.

Related:
Motilal Oswal Nifty Defence Index Fund NFO is now open: should you invest?

Who should invest in the Nifty Defence Index?

“Investors should remember that excitement and expenses are their enemies.” - Warren Buffet

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

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

☑ A keen follower of the Defence sector news and companies

☑ 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?

☑ Would understand the inherent risks of theme-based investing

☑ Has research-based conviction on the entry and exit points for this theme

☑ Understands that thematic stocks have tendencies of a sudden reversal that can wipe out all gains

Who should not invest in the Nifty Defence Index?

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

☑ Interested in this theme now that the index (and funds) exist

☑ Attracted by the recent high returns of this theme

☑ Has not done due diligence beyond reading about this index and funds online

☑ 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?

☑ Disagrees with the Warren Buffett quotation above

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This post titled The NIFTY Defence Index has risen more than 6x in 6 years. Should you invest? first appeared on 14 Jun 2024 at https://arthgyaan.com


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