We evaluate what works and what doesn't for this fund
23-May-2023 •Research Desk
The HDFC Mutual Fund recently announced the launch of the country's first defence fund, the HDFC Defence Fund. The new fund offer (NFO) started accepting investments on May 19, 2023, and will close on May 30, 2023.
So, let's evaluate if this new fund is worth investing in.
Four things you should know
1) The fund will select stocks of companies in the defence sector and allied services that include aerospace, shipbuilding, and allied services sectors.
Our view
The Indian government's 'Make in India' initiative, and the plan to ramp up defence expenditure have recently pushed defence company stocks into the spotlight. Just a few days, reports emerged that India's defence production value grew 12 per cent and breached the Rs 1 lakh crore mark, hinting at greater self-reliance.
2) The fund currently has 21 stocks to invest from. Among them, 18 are small-caps, two are large-caps and one is from the mid-cap universe.
Our view
There are multiple concerns here.
3) Thirteen of the 21 stocks are private sector companies.
Our view
However, the top-2 companies on the defence index are public sector companies. To top it, they alone comprise two-fifths of the total index!
The bad news is that most public sector companies have seldom been wealth-generators for investors. Here's a data-backed story on why you should keep PSUs at a distance.
4) Abhishek Poddar is a first-time fund manager, though he has over a decade-and-a-half experience in the equity space. He was with Kotak before joining HDFC in 2019.
Our view
Poddar starts with a clean slate and it would be erroneous to pass a judgement of any sort.
That said, it is best to choose funds that are overseen by an experienced fund manager with a proven track record of five years and more.
The last word
We have long believed that you only need a diversified equity fund, such as a flexi-cap fund.
Moreover, even if you want to dovetail with India's rapidly-growing defence sector, we'd suggest you look at a diversified fund because they may already have exposure to defence stocks. For instance, stocks of Bharat Electronics - which has close to 20 per cent weightage in the defence index - have already been bought by 240 funds!
In short, keep it simple and avoid highly risky sectoral funds.
Suggested read: Why you should avoid NFOs
These small-cap funds have high large-cap exposure
Are balanced advantage funds buying more equity?
