ABSL MF has launched its Nifty India Defense Index Fund amidst heightened concerns on valuations in this small sector consisting of just 15 stocks. After an astounding 160% 1 yr return, the sector trades at 64 P/E and 17 P/B.
Deepak acknowledges these valuation concerns but stresses the strategic importance of the sector in a new world of geo-political strife and trade re-alignments and India’s position in these realignments – which will continue to provide significant tailwinds for the sector for many years to come.
He believes there is a strong case for a long term satellite position for this sector in investors’ portfolios and says the better way to play this theme is a passive index fund rather than picking a couple of stocks directly.
Since the index currently allows any company with more than 10% of business from defense contracts to be eligible for its universe, there is a good possibility that many of India’s leading companies in the industrials, auto and engineering spaces may qualify in time. Deepak believes NSE will proactively look at eligibility criteria when such situations arise, to ensure that this index continues to represent defense opportunities without getting unduly diluted.
The passives world will be a big beneficiary of recent tax changes which now give uniform LTCG treatment to FoFs and multi asset funds. Expect to see more solution based passive funds getting launched to target specific investor needs.
Deepak believes that factor based passive funds will continue to grow and make a strong space for themselves in the industry.