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Weekly Musings – NFO Pick (Motilal Oswal Nifty India Defence Index Fund)

25 Jun 2024 , 09:08 AM


The Motilal Oswal Nifty India Defence Index Fund is a passive fund with a thematic twist. The portfolio and performance of the fund will be benchmarked to the Nifty India Defence Index TRI (total returns index). Here are key things to know about this fund.

  • 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.
  • There are some apparent advantages of investing in the Motilal Oswal Nifty India Defence Index Fund. Apart from the robust growth of the defence sector; the fund also allows investors to gain exposure to companies that are likely to benefit from the government defence spending. The sector is likely to be immune to business cycles, since it is about national security and geopolitical risk.
  • is this fund risky or is it less risky compared to an active fund. This is a high risk fund for investors. The primary risk here is the sector-specific risk 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.
  • The index is not a static index and here is how it will be regularly monitored and modified. The Nifty India Defence Index is reviewed and rebalanced semi-annually to ensure it accurately reflects the performance of defence sector. This entails adjusting the composition of the index based on the latest market data and company performance. The portfolio is also changed in tandem with such shifts.
  • Before investing in the passive defence fund, be clear that it is meant for you. You should ideally be an investor who is seeking exposure to a high-growth sector with strategic importance and diversifying your portfolio away from regular cycles. The growth in defence is a mix of national priorities and technology. Hence investors must have patience for 5-7 years, at least, to invest in these themes fruitfully.

It is a passive thematic fund, so the advantage is that the investor gets exposure to a diversified portfolio of defence stocks. Being a passive fund, the risk of fund manager bias is also eliminated.


Behind the veneer of geopolitical risk, there is a much sharper story playing out in the Indian defence space. Here are a few thoughts.

  • India is the fourth largest defence spender in the world after the US, China, and Russia. At $84 Billion a year, India’s defence spending is poised to touch $100 Billion a year soon. India’s defence budget has more than doubled in the last 10 years. Also, India’s defence spending is growing at 10% annually, compared to the global average of 3%.
  • The global defence opportunity is likely to expand rapidly in the coming due to increase in geopolitical conflicts in the light of the Russia-Ukraine war and the ongoing war in Gaza. Defence spending is not just about aggression, but also about making your borders safe so that there is peace.
  • Defence modernization is the big story in India. In Union Budget 2024, the government had allocated $72.2 Billion for Defence, which was 13.3% of the total budget. Nearly 25% of the defence budget went towards purchase of new weapons, aircraft, warships, and other military equipment. That is putting defence budget to good use.
  • The Atma Nirbhar Bharat vision and the decision to give more business to domestic defence players, has been a game changer for the Indian defence industry. These two factors have changed the face of defence in India and has made these stocks attractive from a stock market perspective.
  • Defence exports is the other big opportunity for India, with 334% growth in the last 5 years. This year, India plans to touch ₹50,000 Crore in Defence Exports. Major defence companies in India like HAL, Bharat Electronics Ltd, Mazagon Docks and Cochin Shipyards, make products that have global demand.

In short, the India defence story is exciting. The valuations may be slightly on the higher side, but that is natural for an industry that has hardly shown any excitement in the last few years.


Here are some details of the Motilal Oswal Nifty India Defence Index Fund NFO you must know to decide on investing in the fund.

  1. The NFO of Motilal Oswal Nifty India Defence Index Fund opened for subscription on June 13, 2024 and will close on June 27, 2024. Being an open-ended equity oriented thematic index fund, it will reopen for sale and repurchase anywhere between 3 days and 15 days of NFO closure. While the fund has no lock-in period (other than the conditional exit load disincentive), it is suggested to hold such Funds for a period of 5 years or more to get full benefits of the defence story play out in India.
  2. On the Standard SEBI Risk-O-Meter, the Motilal Oswal Nifty India Defence Index Fund will be ranked as a Very High Risk Fund; despite being a passive fund. The high risk is an outcome of the predominant exposure to equities that the Motilal Oswal Nifty India Defence Index Fund will have; tracking the Defence TRI index. 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.
  3. The Motilal Oswal Nifty India Defence Index Fund is about long term capital appreciation through a passive approach of benchmarking to the Nifty Defence India TRI. The fund will run a portfolio that exactly tracks the Nifty Defence India Index TRI and will benchmark to returns on the index pre-expenses. Being an equity index fund, its predominant allocation will be to equities that are part of the Nifty Defence Index.
  4. Investors can invest in the NFO of Motilal Oswal Nifty India Defence Index Fund in minimum size of ₹500 and in multiples of ₹1 thereof. This also applies to switch-ins during the NFO while additional purchases can be in such multiples too. SIP purchases must also be of ₹500 and above. There will be an exit load of 1% of the redemption amount, for redeeming within 15 days of the allotment of the fund. However, there is no exit load if the fund is held for more than 15 days from the date allotment. Exit loads apart; investors are advised to hold the fund for a minimum period of 5-7 years to get full benefits of the defence theme in the Indian context.
  5. The Motilal Oswal Nifty India Defence Index Fund does not give any guarantee on returns, being an equity oriented and market risk driven fund thematic index fund. Despite the best efforts of the research team and the fund managers, returns would still be uncertain and the returns may diverge from the index to which it is benchmarked. Of course, this is an index tracking passive fund, so performance could dip along with the dip in the index performance.
  6. The Motilal Oswal Nifty India Defence Index Fund NFO will offer the growth option and the IDCW (income distribution cum capital withdrawal) option. Within the IDCW option, the fund will offer dividend payout and the dividend reinvestment option. The Motilal Oswal Nifty India Defence Index Fund will offer investment via the Regular Plan or through the Direct plan.
  7. The performance of the Motilal Oswal Nifty India Defence Index Fund will be benchmarked to the underlying Nifty India Defence TRI index.. The TRI (total returns index) is more reflective as it includes the impact of dividends and capital movement. However, being an index fund, the fund does not intend to beat the index, but only mirror the underlying index returns with a portfolio that mirrors the index with the same stock composition.
  8. The fund managers for the Motilal Oswal Nifty India Defence Index Fund will be Swapnil Mayekar and Rakesh Shetty. Both the fund manages bring in-depth to the fund management business and in keeping tracking error to the bare minimum.
  9. The Motilal Oswal Nifty India Defence Index Fund will be classified as an equity fund for tax purposes; as long as its equity exposure is above 65%, which is the intent. The short term capital gains (held for under 1 year) will be taxed at 15% while long term capital gains (held for over 1 year), will be taxed at a flat rate of 10% beyond a minimum threshold exemption of ₹1 Lakh per financial year. There will be no indexation benefits on long term capital gains.

The Motilal Oswal Nifty India Defence Index Fund NFO offers an opportunity for investors to participate in a concentrated defence theme to make the best of the growth of defence spending in India and the positive ramifications for the Indian defence companies.


Related Tags

  • ActiveFunds
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  • AMFI
  • Defence
  • DefenceFund
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