HDFC Defence Fund Pauses SIP & Lumpsum : What's Next?
In the world of the Mutual Fund market, many equity funds have shown remarkable performance. Among them, the HDFC Defence Fund has delivered a particularly shocking and impressive performance. If you had invested in the starting of this scheme in June 2023, you would have seen your investment double in profit.
However, HDFC Mutual Fund has decided to stop the new Systematic Investment Plan or lumpsum investments in this scheme after 22 July. In May 2023, HDFC fund house launched this New Fund Offer (NFO). The response from investors was so positive that the fund had to close ahead of its planned end date. This early closure indicates strong interest and high demand for the fund, reflecting confidence in its investment strategy and potential returns. Let’s explore the reasons behind this decision and understand the nature of this scheme.
What Kind of Scheme is HDFC Defence Fund?
The HDFC Defence Fund is India's first thematic equity fund focused exclusively on the defense sector. It aims to generate capital appreciation by investing in companies involved in defense and related industries. While it has the potential for high returns due to targeted growth in the defense sector, it also carries higher risk compared to diversified equity funds because it depends a lot on the performance of the defense industry. This focus can lead to significant gains when the sector performs well, but also more volatility and risk if the sector faces challenges.
Overview of HDFC Defence Fund
The HDFC Defence Fund is a mutual fund that invests in defense related companies, aiming for capital appreciation. With assets of around Rs. 3,233 crore, it has delivered a 130% return since inception. For example, a Rs. 5,000 monthly SIP from the start would now be worth about Rs. 1.04 lakh. The fund's performance closely mirrors its benchmark, the Nifty India Defence Total Return Index.
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How Does HDFC Defence Fund Investing Strategy Look Like?
The fund's investment strategy is focused on a concentrated portfolio, where the top five stocks make up 61% of the holdings. It primarily targets mid cap and small cap stocks, investing at least 80% of its assets in the defense and allied sectors, such as aerospace and shipbuilding. The fund aims for growth by selecting high-quality companies that are reasonably valued, seeking to balance strong performance potential with cost-effectiveness.
Time for the Performance and Portfolio of HDFC Defence Fund
The fund holds 21 stocks in its portfolio, with more than half of its assets concentrated in its top three holdings: Hindustan Aeronautics, Bharat Electronics, and Astra Microwave Products. Many of these stocks are from public sector companies and are currently close to their highest-ever values. This focus on top-performing stocks aims to maximize returns by investing completely in leading players within the defense sector.
The Reason Why Has HDFC Stopped New Investments?
1.Reasons for Restrictions:
- High Valuations: From July 22, 2024, HDFC Mutual Funds will halt new SIP registrations and lump-sum investments due to elevated stock valuations. The Nifty India Defence Index’s price-to-earnings (PE) ratio has surged to 77.3x, significantly higher than its 5-year average of 34.1x.
- Concentration Risk: The fund’s portfolio is highly concentrated, with nearly 86% of its assets in the top 10 stocks.
- Current Operations: Existing SIPs and transactions will continue, but no new SIPs will be accepted. Redemptions and switch-outs will still be permitted.
2. Market Dynamics and Government Support:
- Sector Rally: The defense sector has recently rallied due to strong government efforts to boost local production and exports.
- Increased Budget Allocation: The government has increased defense capital allocation to ₹1.72 lakh crore in the interim Budget.
- Broader Impact: Similar restrictions have been applied to other small-cap funds due to comparable valuation concerns.
Expert Who Manage HDFC Defence Fund
Mr. Abhishek Poddar, the fund manager, expects that global defense spending will increase as countries upgrade their military capabilities. He sees this as a great opportunity for Indian defense companies, thanks to more investment in research, development, and better manufacturing techniques.
Conclusion
The HDFC Defence Fund is managed by Abhishek Poddar and focuses solely on investing in companies within the defense industry. The fund's performance is measured against the Nifty India Defence Index TRI. The fund aims to capitalize on the growth and opportunities in the defense sector, which has been boosted by increased government spending and favorable global defense trends.
While HDFC Mutual Fund has stopped accepting new investments in this fund due to high stock valuations in the defense sector, existing investors can continue to benefit from the fund's specialized investment strategy and the ongoing positive developments in the defense market.
This means that if you've already invested in SIP (Systematic Investment Plan) in the HDFC Defence Fund for long term, you can still enjoy the potential gains that may come from the fund's focused approach and the favorable conditions in the defense industry. However, new investors cannot join the fund at the moment.
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Best Funds
| Top funds | 1M Return | 6M Return | 1Y Return | 3Y Return | 5Y Return |
|
|
|---|---|---|---|---|---|---|---|
| HDFC Retirement Savings Fund - Equity Plan - Growth Option | 1.87% | 17.97% | 37.27% | 23.34% | 26.05% | Invest | |
| HDFC Ultra Short Term Fund - Growth Option | 0.61% | 3.71% | 7.26% | 5.8% | 5.68% | Invest | |
| HDFC Overnight Fund - Growth Option | 0.53% | 3.23% | 6.68% | 5.5% | 4.68% | Invest | |
| HDFC ELSS Tax saver Fund - Growth Plan | 1.2% | 19.01% | 47.09% | 25.91% | 23.48% | Invest | |
| HDFC Balanced Advantage Fund - Growth Plan | 0.8% | 14.14% | 37.88% | 25.15% | 22.04% | Invest |