6 Equity Mutual Funds to Benefit from India’s Defence Sector (2024)

Rounaq Neroy

Aug 18, 2023 / Reading Time: Approx. 18 mins

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6 Equity Mutual Funds to Benefit from India’s Defence Sector (1)

For a nation to walk on the path to progress and security of the people, defence plays an important role. In recent years, particularly after Russia's invasion of Ukraine, U.S.-China strained relations, so between North Korea and South Korea, India-China, and the crisis hit Pakistan, the geopolitical risk has heightened.

As per the global BlackRock Geopolitical Risk Indicator (BGRI), medium-to-high risks emanate from potential major cyber-attacks, terror attacks, tensions in the Gulf region, U.S.-China strategic competition, and Russia-NATO conflict. Even international rating agency S&P Global has highlighted these among the top 10 geopolitical risks of 2023.

Graph 1: BlackRock Geopolitical Risk Indicator

6 Equity Mutual Funds to Benefit from India’s Defence Sector (2)
(Source: www.blackrock.com)

Keeping a tab on the dynamic geopolitical environment, India over the last few years under the Modi-led-NDA government has made sizeable investments in the defence sector.

According to Stockholm International Peace Research Institute (SIPRI), India ranks third in defence expenditure after China and the U.S. In the Union Budget 2023, the government allocated Rs 5.95 trillion, an increase of 13% from the previous union budget. There is a clear thrust on the modernisation of India's defence capabilities.

In the last fiscal year, i.e., 2022-23, India's defence production or turnover crossed over Rs 1 trillion for the first time ever (touched Rs 1.06 trillion), a rise of more than 12% over FY 2021-22 as per the Press Release of the Ministry of Defence. And if private firms engaged in defence industries are added, this figure is expected to be more. The number of defence licenses issued to industries in the last 7-8 years by the government have increased by almost 200%, according to the Ministry of Defence with emphasis on 'Make in India' and Aatmanirbharta (self-reliance) in defence. The Prime Minister, Narendra Modi has often stated that government will keep supporting efforts to make India a defence production hub.

The production target set by the government for India's defence sector is Rs 1.75 trillion (around USD 22 billion) by 2025. Out of that, exports would also play a pivotal role for players in the defence sectors. Last year, India's defence exports reached an all-time high of Rs 16,000 crore, which is 10x since 2016-17. Particularly over the last 5-6 years, the government has taken several policy initiatives and brought reforms to give a push to India's defence exports. From being an importer of various types of defence items eight years ago, today exports major platforms like Dornier-228, 155 mm Advanced Towed Artillery Guns (ATAGs), Brahmos Missiles, Akash Missile System, Radars, Simulators, Mine Protected Vehicles, Armoured Vehicles, PINAKA Rockets & Launchers, Ammunitions, Thermal Imagers, Body Armours, besides Systems, Line Replaceable Units and Parts & components of Avionics, and Small Arms. Plus, there is a growing demand for LCA-Tejas, Light Combat Helicopters, Aircraft Carrier, MRO activities etc. The government has set a target of USD 5 billion in defence exports by 2025.

Given the above, the potential to benefit by sensibly taking exposure to defence sector stocks is huge!

Graph 2: Nifty India Defence Index - TRI vs. Nifty 50 - TRI

6 Equity Mutual Funds to Benefit from India’s Defence Sector (3)
Base = Rs 10,000
Data as of August 16, 2023
Past performance is not an indicator of future returns.
(Source: ACE MF, data collated by PersonalFN Research)

With which much progress made by India's defence sector in the last 5 years, the Nifty India Defence Index - TRI (which tracks the performance of listed defence companies) has delivered a compounded annualised return of 30.46% (as of August 16, 2023) -- outperforming the Nifty 50 -TRI and creating wealth for investors. Companies that have been the beneficiaries of India's thriving defence sector, especially the missile programme and aerospace sector, plus those in naval/marine capabilities, have done exceptionally well.

Table 1: Top-10 defence companies that all equity mutual funds have exposure to

Company NameMutual Fund Holding - Mkt Value (Rs in Cr) as of 31stJuly 2023#Price as of 16thAug 2023Price as of 16thAug 2022% Change in Price since 16thAug 2022
Astra Microwave Products Ltd.235.10358.70275.7030.11%
Bharat Dynamics Ltd.1,360.291141.95841.8235.65%
Bharat Electronics Ltd.*11,024.23131.3097.9334.08%
Bharat Forge Ltd.7,561.79960.15779.0023.25%
Cochin Shipyard Ltd.2.92807.85336.05140.40%
Hindustan Aeronautics Ltd.6,630.153900.152297.3069.77%
Mazagon Dock Shipbuilders Ltd.38.561935.70320.15504.62%
MTAR Technologies Ltd.1,394.932227.551600.2539.20%
Premier Explosives Ltd.3.871058.25345.55206.25%
Solar Industries India Ltd.3,508.624264.553302.9529.11%
Defence Sectors Funds are also included.
#Portfolio data as of July 31, 2023
*Price adjusted for Bonus issue announced in August 2022.
Market Price data as per the stock exchange data.
Past performance is not an indicator of future returns.
(Source: NSE, data collated by PersonalFN Research)

As seen in Table 1, many companies in the defence sector, such as Mazagaon Dock Shipbuilders, Cochin Shipyard, and Premier Explosives, among others have delivered handsome returns since August last year. Many mutual fund schemes have held respectable exposure to defence stocks, enabling them to benefit from their rally.

Out of a total of 267 diversified equity mutual fund schemes taken into consideration and one defence sector-specific scheme, at least 1 scheme has invested in at least one defence stock as per the portfolio as of July 31, 2023. Seventeen schemes have an exposure of 5% or more, 48 have an exposure of around 3-4%, 95 mutual fund schemes have an exposure between 1% and 2%, and 23 schemes have an exposure of less than 1% to defence stocks.

Table 2: Top-5 Fund houses with high exposure to defence stocks in their equity schemes

Fund House NameExposure as a % of the Equity AUM
Kotak Mutual Fund4.67%
HDFC Mutual Fund3.76%
Invesco Mutual Fund3.41%
DSP Mutual Fund3.33%
ITI Mutual Fund2.89%
Portfolio data as of July 31, 2023
(Source: ACE MF, data collated by PersonalFN Research)

At the fund house level Kotak Mutual Fund, HDFC Mutual Fund, Invesco Mutual Fund, DSP Mutual Fund, and ITI Mutual Fund have a noticeable exposure to India's defence sector.

Speaking of the equity mutual fund scheme, here are the five having high exposure to defence stocks...

Table 3: Top 5 diversified equity funds with high exposure to defence stocks

Scheme NameExposure as a % of the portfolio
HDFC Defence Fund61.22
360 ONE Quant Fund9.73
ITI Mid Cap Fund7.80
Edelweiss Mid Cap Fund7.25
Kotak Emerging Equity Fund7.15
Tata Dividend Yield Fund6.86
Portfolio data as of July 31, 2023
(Source: ACE MF, data collated by PersonalFN Research)

The recently launched HDFC Defence Fund, which is a sector-specific scheme, currently has 61.22% exposure to defence stocks. Besides, it invests in allied companies that are in defence-related activities.

#1: HDFC Defence Fund

Launched in June 2023, HDFC Defence Fund, under normal circ*mstances, has the mandate to invest 80% to 100% of its assets in equity and equity-related instruments of Defence & allied sector Companies. Currently, the fund holds a concentrated portfolio of 18 stocks, wherein a majority are largecaps (50.23%) and the remaining 49.77% are midcaps and smallcaps.

Table 4: Top defence stock holdings of HDFC DefenceFund

Stocks% of assets
Hindustan Aeronautics Ltd.22.41
Bharat Electronics Ltd.17.09
MTAR Technologies Ltd.8.48
Bharat Dynamics Ltd.5.92
Solar Industries India Ltd.5.83
Bharat Forge Ltd.1.16
Premier Explosives Ltd.0.32
The list is not exhaustive.
Data as of July 31, 2023
(Source: ACE MF, data collated by PersonalFN Research)

Among the defence stocks, Hindustan Aeronautics, Bharat Electronics, MTAR Technologies, Bharat Dynamics and Solar Industries India, are among the top-5 defence stocks as of July 31, 2023. Then among the allied ones are those in the engineering and capital goods space, such as L&T, BEML, Bharat Forge, and so on, which are also engaged in the defence business. Want to know the other stocks in the HDFC Defence Fund's portfolio? Visit its factsheet here.

Note, HDFC Defence Fund, after receiving a good response for its NFO and recognising that its investment universe is limited (total 21 stocks), has restricted fresh investments. This is done to preserve the overall investment strategy and safeguard the interests of current investors.

[Read: HDFC Mutual Fund Restricts Lumpsum Investments in HDFC Defence Fund. Here's Why]

#2: 360 ONE Quant Fund

Launched in November 2021 amidst the COVID-19 pandemic, 360 ONE Quant Fund (from the stable of 360 ONE Mutual Fund, erstwhile known as IIFL Mutual Fund) is a thematic fund pursuing a quant approach for its portfolio construction activity. As per its July 2023 portfolio, the fund has 9.73% exposure to key defence stocks (out of a total portfolio of 34 stocks).

Table 5: Top defence stock holdings of 360 ONE Quant Fund

Stocks% of assets
Hindustan Aeronautics Ltd.3.49
Bharat Electronics Ltd.3.25
Bharat Forge Ltd.2.99
The list is not exhaustive.
Data as of July 31, 2023
(Source: ACE MF, data collated by PersonalFN Research)

The top-10 stocks comprise 34.78% of the current portfolio, and the defence stocks, such as Hindustan Aeronautics and Bharat Electronics, are very much a part of it. The overall portfolio as of July 2023 of 360 ONE Quant Fund is mainly in largecaps (80.51%) and the remaining (19.49%) in midcaps.

#3: ITI Mid Cap Fund

Launched in March 2021 amidst the COVID-19 pandemic, the ITI Mid Cap Fund, in line with its mandate to invest in midcap companies, has exposure to five defence stocks, comprising 7.80% of its equity portfolio.

Table 6: Top defence stock holdings of ITI Mid Cap Fund

Stocks% of assets
Solar Industries India Ltd.2.10
Bharat Electronics Ltd.1.58
Bharat Forge Ltd.1.40
Hindustan Aeronautics Ltd.1.40
Bharat Dynamics Ltd.1.32
The list is not exhaustive.
Data as of July 31, 2023
(Source: ACE MF, data collated by PersonalFN Research)

Solar Industries India is ITI Midcap Fund's top defence holding also featuring in the top 10 stocks of the scheme. Overall, the fund holds a well-diversified portfolio of 73 stocks in congruence with its investment mandate of investing in midcaps. The scheme follows a bottom-up approach to stock selection to pick good and sound businesses.

#4: Edelweiss Mid Cap Fund

Launched over a decade ago in January 2013, formerly as Edelweiss Mid and Small Cap Fund, after the mutual fund categorisation and rationalisation norms was re-categorised as a mid-cap mutual fund scheme. The fund at present aims to generate long-term capital appreciation from a portfolio that predominantly invests in equity and equity-related securities of midcap companies. In line with that, Edelweiss Mid Cap Fund holds 62.20% of its equity portfolio in midcap, 6.26% in smallcaps, and the balance (31.54%) in largecaps.

Table 7: Top defence stock holdings of Edelweiss Mid Cap Fund

Stocks% of assets
Bharat Electronics Ltd.2.30
Solar Industries India Ltd.2.19
Bharat Dynamics Ltd.1.83
Bharat Forge Ltd.0.94
The list is not exhaustive.
Data as of July 31, 2023
(Source: ACE MF, data collated by PersonalFN Research)

The fund currently has 55 stocks in its portfolio, and the top 10 holdings comprise 34.16% of the portfolio. However, the fund holds none of the aforementioned defence stocks in the top-10 holdings. In other words, the exposure to defence stocks is small, i.e. 7.25% of its total assets.

#5: Kotak Emerging Equity Fund

Launched in March 2007 as a mid and small cap fund, was recategorised as a mid cap fund after SEBI's recategorisation and rationalisation norms. At present, Kotak Emerging Equity Fund aims to generate long-term capital appreciation from a portfolio of equity and equity-related securities by investing predominantly in midcap companies. The fund holds a well-diversified 78 stocks in line with its investment mandate.

Table 8: Top defence stock holdings of Kotak Emerging Equity Fund

Stocks% of assets
Solar Industries India Ltd.2.46
Bharat Forge Ltd.2.39
Bharat Electronics Ltd.2.29
The list is not exhaustive.
Data as of July 31, 2023
(Source: ACE MF, data collated by PersonalFN Research)

The top 10 stocks comprise 30.51% of the portfolio, of which Solar Industries -- a defence stock -- is one of them. The other defence stocks in its portfolio are Bharat Forge and Bharat Electronics. Kotak Emerging Equity Fund's overall exposure to defence stocks is 7.15%

By holding a robust portfolio by following a bottom-up approach to stock picking and buy-and-hold strategy, overall Kotak Emerging Equity Fund has lived up to its mandate and rewarded investors with superior risk-adjusted returns. It is one of the top performers among the mid cap funds.

#6: Tata Dividend Yield Fund

Launched in May 2021 amid the COVID-19 pandemic, this fund with a mandate to mainly invest in dividend-yielding companies also has exposure to some of the dividend-paying defence stocks such as Bharat Electronics and Hindustan Aeronautics. Overall, these two defence companies are 6.86% of the portfolio. Bharat Electronics is part of the top 10 holdings of the fund.

Table 9: Top defence stock holdings of Tata Dividend Yield Fund

Stocks% of assets
Bharat Electronics Ltd.5.22
Hindustan Aeronautics Ltd.1.64
The list is not exhaustive.
Data as of July 31, 2023
(Source: ACE MF, data collated by PersonalFN Research)

With 49 stocks in its portfolio and top-10 stocks comprising 38.60%, the overall equity portfolio of Tata Dividend Yield Fund is well-diversified -- at present, 70.73% in largecaps, 26.26% in midcap, and the remaining 3.02% in smallcaps. The fund is almost fully invested with only around 4% of its total assets in debt and cash.

How have mutual fund schemes betting on the defence sector performed?

Diversified equity mutual fund schemes with only some portion of their equity portfolio held in defence stock have underperformed vis-a-vis the Nifty India Defence - TRI (which mainly tracks the performance of listed defence companies).

Table 10: Performance of mutual fund schemes betting on defence stocks

Scheme NameAbsoluteCAGRRatio
6 Months1 Year2 Years3 Years5 Years7 YearsSD AnnualisedSharpe
Kotak Emerging Equity Fund15.3417.1016.0432.5918.8417.8315.660.46
Edelweiss Mid Cap Fund16.2116.9315.2932.3718.2517.9117.210.44
Tata Dividend Yield Fund16.1519.2913.28------14.290.20
ITI Mid Cap Fund18.0217.5810.22------15.450.19
360 ONE Quant Fund20.0318.89--------18.730.15
NIFTY 100 - TRI9.407.958.7620.8511.9713.1914.780.30
NIFTY 50 - TRI8.7210.359.7221.7212.6513.6914.540.32
NIFTY 500 - TRI12.4111.2910.6423.5712.9413.9015.150.34
Nifty India Defence - TRI41.8366.7571.0553.9929.68--21.530.67
Nifty Midcap 150 - TRI21.8421.0917.7832.7916.8617.4117.920.42
Nifty Smallcap 250 - TRI23.8626.0314.7135.7714.8914.4521.010.41
S&P BSE SENSEX - TRI7.8710.9910.0021.4713.0714.2614.650.31
Data as of August 16, 2023
The list is not exhaustive.
The securities quoted are for illustration only and are not recommendatory.
Direct Plan-Growth option considered.
Returns considered are point-to-point and expressed in %.
Returns over 1 year are compounded annualised; else absolute.
Standard Deviation indicates Total Risk, while Sharpe and Sortino Ratios measure the Risk-Adjusted Return. They are calculated over a 3-Yr period assuming a risk-free rate of 6% p.a
Past performance is not an indicator of future returns.
The table above is NOT a recommendation as such. Speak to your investment advisor for further assistance before investing.
Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully.
(Source: ACE MF; Data collated by PersonalFN Research)

That being said, the positive performance of certain defence stocks (along with non-defence stocks) in their portfolio has helped diversified equity mutual funds, such as Kotak Emerging Equity Fund and Edelweiss Mid Cap Fund, to deliver returns almost in line with their midcap benchmark index.

The Outlook for the Defence Sector in India

India's defence minister, Mr. Rajnath Singh has dubbed the Indian defence industry as the sunrise sector of the future. The 'Make in India' (indigenisation) drive, with emphasis on 'Aatmanirbharta' (self-reliance) in defence, is expected to augur well. Several defence companies in India have a strong and growing order book. Moreover, the book-to-bill ratio (which is the ratio of new orders received to the units billed) of many defence companies is attractively placed.

In other words, the defence sector has got enough steam and many tailwinds working in its favour.

That said, many defence stocks are already at their multi-year high (all-time highs in some cases). This is a challenging scenario if you are considering direct investment in defence stocks. It would be worthwhile taking exposure to the defence theme via some of the best-diversified equity mutual funds. Mutual fund schemes holding fundamentally sound defence stocks with encouraging order books (and having the capability to execute orders on time) are likely to benefit and generate wealth for investors in time to come.

Happy Investing!

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6 Equity Mutual Funds to Benefit from India’s Defence Sector (4)

ROUNAQ NEROY heads the content activity at PersonalFN and is the Chief Editor of PersonalFN’s newsletter, The Daily Wealth Letter.
As the co-editor of premium services, viz. Investment Ideas Note, the Multi-Asset Corner Report, and the Retire Rich Report; Rounaq brings forth potentially the best investment ideas and opportunities to help investors plan for a happy and blissful financial future.
He has also authored and been the voice of PersonalFN’s e-learning course -- which aims at helping investors become their own financial planners. Besides, he actively contributes to a variety of issues of Money Simplified, PersonalFN’s e-guides in the endeavour and passion to educate investors.
He is a post-graduate in commerce (M. Com), with an MBA in Finance, and a gold medallist in Certificate Programme in Capital Market (from BSE Training Institute in association with JBIMS). Rounaq holds over 18+ years of experience in the financial services industry.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.

I am Rounaq Neroy, a financial expert with over 18 years of experience in the financial services industry. My extensive background includes a post-graduate degree in commerce (M. Com) and an MBA in Finance, along with a gold medal in the Certificate Programme in Capital Market. I have actively contributed to various financial publications and educational resources, focusing on empowering investors to make informed decisions.

In the provided article, the focus is on India's defense sector and its potential impact on equity mutual funds. The evidence presented in the article includes information from reputable sources such as the BlackRock Geopolitical Risk Indicator (BGRI), S&P Global, and the Stockholm International Peace Research Institute (SIPRI). The article discusses the geopolitical risks affecting the world, emphasizing India's response to these challenges under the Modi-led NDA government.

Key concepts covered in the article:

  1. Geopolitical Risks: The article highlights the increased geopolitical risks globally, including major cyber-attacks, terror attacks, and tensions between various nations.

  2. India's Defense Investments: The Modi-led NDA government's substantial investments in India's defense sector are discussed, with data from the Union Budget 2023 indicating a 13% increase in defense allocation.

  3. Defense Production and Exports: The article provides insights into India's defense production, emphasizing the government's focus on 'Make in India' and self-reliance in defense. The target for defense exports by 2025 is set at USD 5 billion.

  4. Performance of Defense Sector Stocks: The Nifty India Defence Index is introduced, showing a compounded annualized return of 30.46% over the last five years, outperforming the Nifty 50.

  5. Top Defense Companies: A list of top-10 defense companies held by equity mutual funds is provided, including market values and percentage changes in stock prices.

  6. Mutual Fund Exposure: The article details mutual funds' exposure to defense stocks, with information on the top fund houses and diversified equity funds with significant exposure to the defense sector.

  7. Sector-Specific Mutual Funds: Specific funds, such as HDFC Defence Fund, 360 ONE Quant Fund, ITI Mid Cap Fund, Edelweiss Mid Cap Fund, Kotak Emerging Equity Fund, and Tata Dividend Yield Fund, are discussed, including their exposure to defense stocks and top holdings.

  8. Performance Comparison: The performance of mutual fund schemes with exposure to defense stocks is compared against benchmark indices, showcasing returns over various time periods.

  9. Outlook for the Defense Sector: The article concludes with an outlook for India's defense sector, highlighting it as a sunrise sector with potential growth, despite some stocks being at multi-year highs.

  10. Disclaimer: The article includes a disclaimer, stating that the information is for informational purposes only and should not be considered as a mutual fund recommendation.

This comprehensive coverage demonstrates a deep understanding of the financial landscape, backed by evidence from reliable sources and a nuanced analysis of the defense sector's impact on mutual funds.

6 Equity Mutual Funds to Benefit from India’s Defence Sector (2024)
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