Motilal Defence Fund breaks record at Rs 1676 cr but is it worth investing?

 Motilal Oswal Asset Management Company (MOAMC) is celebrating the resounding success of its "Motilal Oswal Nifty India Defence Index Fund." The New Fund Offer (NFO) period, which ran from June 13th to June 27th, 2024, garnered a staggering Rs 1,676 crore. This New Fund Offer has set a new benchmark with the highest-ever collection by an equity index fund. 

This NFO stands out for being India's first-ever defence index fund. It provides investors with exposure to a basket of defence stocks listed on Indian exchanges, allowing them to capitalize on the potential growth of the domestic defence sector.

This open-ended fund marks the second such offering in India, following HDFC's launch last year. However, the Motilal Oswal fund takes a unique approach - it's a passive fund that tracks the Nifty India Defence Index. This means the fund's performance is directly tied to the performance of the index, offering investors a convenient way to gain exposure to the entire Indian defence sector.

The Nifty India Defence Index Fund tracks the performance of the Nifty India Defence Index. This is an index of the top companies in the Indian defence sector. The fund offers investors with an opportunity to gain exposure to the defence sector through a diversified passive portfolio of pure defence stocks.

" India’s strides towards Atmanirbharta (Self-Reliance) in defence is paving the way for significant growth and innovation. This fund is a testament of the faith that investors have in Motilal Oswal AMC’s products. This fund is poised to benefit from India's increasingly robust advancements in defence technology and infrastructure, and our investors will be an active part of India’s defence growth story," said  Prateek Agrawal, MD & CEO, Motilal Oswal Asset Management Company.

The open-ended fund replicating/tracking the total returns of the Nifty India Defence index has appealed to more than 2,48,000 unique investors from across 16,900 pin codes in India.Units for the fund were allocated on July 3rd, and the scheme reopens for further subscription and redemption on July 9th. 

 Launched on January 19, 2022, the Nifty India Defence Index TRI is home to 15 companies that broadly represent the defence sector. Of these, the top 10 comprise around 94 per cent of the portfolio. The weight of each stock in the index is based on free-float market capitalisation and is adjusted every six months (March and September).

Over the 1 year and 3-year CAGR, of Nifty India Defence Index has been 177% and 89.5% respectively as of end of May 31, 2024. While Defence exhibits strong performance potential, it may also experience higher volatility. The Nifty India Defence Index has delivered impressive returns, reflecting the increased government focus on domestic defence manufacturing. This focus is evident in initiatives like "Atmanirbhar Bharat" (Self-Reliance), which aims to reduce dependence on imported defence equipment and boost domestic production.

Performance of the defence index

"Increased government focus on defence manufacturing in recent years has been a godsend for the index. Most defence companies, many of them government-owned enterprises (PSUs), have seen their stock prices zoom in the last couple of years. The numbers attest to that. The defence index has outpaced the broader market nearly four times based on three-year rolling returns..... HDFC Defence Fund, the first actively managed defence fund, has been a beneficiary, delivering over 130 per cent returns since its inception in May 2023. While such returns are a dream for any investor, you should consider the following: Sectoral risk: One, defence funds are sectoral in nature. Usually, such funds have taken investors on a white-knuckle ride in the long run, wherein you experience significant periods of boom and bust. Frothy valuations: Two, while defence spending has ramped up significantly, the recent surge in stock prices has also put a question mark on their valuation," said Ameya Satyawadi of Value Research. 

High risk fund 

Brokerage IIFL believes this is a high risk fund for investors because it is  sector-specific since the fund performance will closely track the defence sector; and many of them are quoting at steep P/E ratios. Government priorities may change, when it comes to in-sourcing and there could also be liquidity related risks since many of these stocks do not have institutional level liquidity. In addition, there is also the risk of entering the market at lifetime highs of the market. The fund will be benchmarked to the Nifty India Defence TRI, so the thematic risks of the index will get transmitted to the fund also.

Market Risk and Returns: This fund is categorized as an equity-oriented thematic index fund. Since it tracks the market, there is inherent risk, and returns cannot be guaranteed. Performance can fluctuate and may not perfectly mirror the benchmark index.

Investment Options

Growth Option: This option allows capital appreciation through reinvestment of dividends.

IDCW Option (Income Distribution cum Capital Withdrawal): This option offers a choice between dividend payouts or dividend reinvestment.

Investment Plans

Regular Plan: This plan involves a higher expense ratio compared to the Direct Plan due to commission charges paid to distributors.

Direct Plan: This plan offers lower expense ratios as investors can eliminate distributor commissions by investing directly with the fund house.

Benchmarking and Tracking Error

• The fund's performance is benchmarked against the Nifty India Defence TRI (Total Return Index). This index reflects the impact of dividends and capital movements, providing a more comprehensive picture.
• The fund managers, Swapnil Mayekar and Rakesh Shetty, aim to minimize tracking error, ensuring the fund's performance closely resembles the benchmark index.

Taxation

• Classified as an equity fund, the fund is subject to capital gains tax.
• Short-term capital gains (less than 1 year) are taxed at 15%.
• Long-term capital gains (over 1 year) exceeding Rs 1 lakh per year are taxed at 10% without indexation benefits.