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


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

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 Name Mutual Fund Holding – Mkt Value (Rs in Cr) as of 31st July 2023# Price as of 16th Aug 2023 Price as of 16th Aug 2022 % Change in Price since 16th Aug 2022
Astra Microwave Products Ltd. 235.10 358.70 275.70 30.11%
Bharat Dynamics Ltd. 1,360.29 1141.95 841.82 35.65%
Bharat Electronics Ltd.* 11,024.23 131.30 97.93 34.08%
Bharat Forge Ltd. 7,561.79 960.15 779.00 23.25%
Cochin Shipyard Ltd. 2.92 807.85 336.05 140.40%
Hindustan Aeronautics Ltd. 6,630.15 3900.15 2297.30 69.77%
Mazagon Dock Shipbuilders Ltd. 38.56 1935.70 320.15 504.62%
MTAR Technologies Ltd. 1,394.93 2227.55 1600.25 39.20%
Premier Explosives Ltd. 3.87 1058.25 345.55 206.25%
Solar Industries India Ltd. 3,508.62 4264.55 3302.95 29.11%

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 Name Exposure as a % of the Equity AUM
Kotak Mutual Fund 4.67%
HDFC Mutual Fund 3.76%
Invesco Mutual Fund 3.41%
DSP Mutual Fund 3.33%
ITI Mutual Fund 2.89%

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 FundInvesco Mutual FundDSP 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 Name Exposure as a % of the portfolio
HDFC Defence Fund 61.22
360 ONE Quant Fund 9.73
ITI Mid Cap Fund 7.80
Edelweiss Mid Cap Fund 7.25
Kotak Emerging Equity Fund 7.15
Tata Dividend Yield Fund 6.86

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 circumstances, 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 Mid-Cap Opportunities Fund

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 mid-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 Name Absolute CAGR Ratio
6 Months 1 Year 2 Years 3 Years 5 Years 7 Years SD Annualised Sharpe
Kotak Emerging Equity Fund 15.34 17.10 16.04 32.59 18.84 17.83 15.66 0.46
Edelweiss Mid Cap Fund 16.21 16.93 15.29 32.37 18.25 17.91 17.21 0.44
Tata Dividend Yield Fund 16.15 19.29 13.28 14.29 0.20
ITI Mid Cap Fund 18.02 17.58 10.22 15.45 0.19
360 ONE Quant Fund 20.03 18.89 18.73 0.15
NIFTY 100 – TRI 9.40 7.95 8.76 20.85 11.97 13.19 14.78 0.30
NIFTY 50 – TRI 8.72 10.35 9.72 21.72 12.65 13.69 14.54 0.32
NIFTY 500 – TRI 12.41 11.29 10.64 23.57 12.94 13.90 15.15 0.34
Nifty India Defence – TRI 41.83 66.75 71.05 53.99 29.68 21.53 0.67
Nifty Midcap 150 – TRI 21.84 21.09 17.78 32.79 16.86 17.41 17.92 0.42
Nifty Smallcap 250 – TRI 23.86 26.03 14.71 35.77 14.89 14.45 21.01 0.41
S&P BSE SENSEX – TRI 7.87 10.99 10.00 21.47 13.07 14.26 14.65 0.31

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!

This article first appeared on PersonalFN here

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