This Diwali is about Defence Funds

The Nifty India Defence Index, which tracks the progress of defence-related companies listed on the stock exchange, has delivered a compounded annual growth rate of 26.8 per cent over the last five years, surpassing the broader Nifty 50 benchmark. However, this index has recently experienced a significant downturn from its 52-week high. The Nifty India Defence Index reached its peak of 8,302 on July 11, following which it saw a steep decline. At present, this index is trading at 6,808, showing a decrease of nearly 27 per cent from its all-time high.

Except for one company, Zen Technologies, all other constituents of the index are down from their all time highs, ranging from 15-50 per cent. We think the recent decline is due to overvaluation. The fundamentals of defence companies remain solid. The drop in stock prices has led to Mutual Funds like the Motilal Oswal Nifty India Defence Index Fund being offered at discounted rates. The Mutual Fund’s Net Asset Value (NAV) for the Regular Plan is currently trading at Rs. 7.94.

Defence Mutual Funds are made up of companies primarily involved in research, development, manufacturing, or selling products and services related to defence and military operations. They fall under the category of thematic mutual funds, providing investors with a chance to be part of a sector crucial to national security and benefiting from government defence spending. The defence sector’s financial foundation is stronger than ever, given the continuous rise in India’s defence budget year after year.

The defence sector in India is on the rise, with defence production revenue exceeding Rs. 1 trillion, marking a notable increase from the previous year. The ‘Make in India’ initiative and the push towards Aatmanirbhar Bharat in defence manufacturing are expected to boost the sector’s growth. Considering the long-term prospects of the defence sector, we see potential in Defence Mutual Funds. Investing through SIPs in defence funds can lead to decent returns over the next 3-5 years. It’s advisable for investors to avoid making large lump sum investments and instead opt for SIPs.