Fund Radar: Defence funds are soaring. Good time to invest?

Recent geopolitical sparks with Pakistan lit a fire under defence stocks. Naturally, defence funds rode the wave too. Since Operation Sindoor on May 7, the Nifty India Defence Index has surged 22 per cent (as of May 23), while the broader Nifty 500 edged up just 3 per cent. Clearly, the market picked its favourite regiment. But should you enlist too? Let’s unpack defence funds and see if they truly deserve a place in your portfolio. What do defence funds hold? The defence fund space is still young. There’s just one actively managed fund — the HDFC Defence Fund — which has been around for nearly two years. The rest are young. Five passive options (including ETFs and FoFs) tracking the Nifty India Defence Index, none of which has completed even a year. So, what are these funds loading up on? For passive funds, we’ll look at the largest constituents of the defence index since that’s what they mirror. A quick glance reveals that the top three holdings are identical in both the HDFC Defence Fund and the index, and carry nearly the same weights. Together, they make up a hefty 54 per cent of the portfolio. Zooming out, the top five stocks account for 69 per cent of the HDFC fund and 71 per cent of the index. In short, both portfolios are highly concentrated, with just a few stocks driving the bulk of the performance. Also, it is interesting to note that HDFC Defence Fund has almost 62 per cent ov