HDFC Defence Fund Has Doubled Investor Wealth In A Year — Time To Book Profit?

With the HDFC Defence Fund having more than doubled investor wealth since its launch nearly a year ago, market experts are suggesting that investors who managed to get in early should take some money off the table.

Launched in June last year, this scheme has notched up a 130% point-to-point return. The only such fund currently available, it is also the best-performing scheme in the sectoral-thematic category of actively managed equity schemes.

The scheme is categorised as a sectoral fund and has benefited from red-hot investor interest in companies, which have seen their order books swell with the government’s drive to increase indegenisation in the defence space. In the interim budget this year, the Modi government allocated Rs 1.72 lakh crore towards capital expenditure in defence, nearly 60% higher than it did five years ago.

The HDFC Defence Fund, as of the last count, is comprised of 21 stocks. Over half of the fund's assets under management are concentrated in the top three companies—Hindustan Aeronautics Ltd., Bharat Electronics Ltd., and Astra Microwave Products Ltd.—while the remaining 18 account for 49.8%.

There are five public sector utilities, which also account for a little over half the assets under management.

Many of these stocks have seen their prices soar and are currently sitting at life-time highs.

Out of the 21 stocks in the fund's portfolio, 17 are covered by analysts tracked by Bloomberg. And less than half of them have consensus price targets that still indicate a positive return potential over the next year. These eight stocks account for 22.6% of the fund’s assets under management. The remaining two-thirds of the portfolio have targets that imply a downside.

The scheme saw unprecedented interest in the first couple of weeks of operation, prompting the fund house to stop inflows through lump sums. Systematic investment plans were allowed to continue.

Investors who chose to start SIPs in the first month themselves have received an annualised return of 160%. As an illustration, a monthly SIP of Rs. 5,000 would currently be worth Rs 1,04,382. The benchmark, the Nifty India Defence Total Return Index, has recorded a similar return on a point-to-point basis.

Investors are betting on improved prospects for India’s defence sector, with a higher outlay from the government and an increase in exports in the coming years. In fact, the new government has already stated its intention to facilitate an increase in defence exports from India.

In a recent interaction, Rajnath Singh, the newly sworn-in Union defence minister, said, “The new government led by Prime Minister Narendra Modi will prioritise enhancing national security through the modernisation of the military and the promotion of local defence production. The government will work assiduously to increase defence exports to Rs 50,000 crore by 2028–29 from the current Rs 21,083 crore.”

But experts are advocating caution.

“It has given five-year returns in a year, so whether it will continue to do well is a question,” said Vijai Mantri, co-founder and chief investment strategist at JRL Money.

“When there is big money in a sector, protecting the principal is the priority along with reducing holdings,” he said, recommending a transfer of all gains over the next six months to a year by using the systematic transfer plan route, possibly into a broader theme like manufacturing.

“A lay investor, who cannot time the market during entrance or exit, shouldn’t go for sectoral funds, as one can be positively or negatively affected by a lot of factors,” said Amol Joshi, founder of PlanRupee Investment Services.

He recommends that lay investors steer clear of concentrated investments like sectoral funds.