HDFC Mutual Fund, on June 9, 2023, announced the discontinuation of lumpsum subscriptions and new restrictions on systematic transactions in its HDFC Defence Fund starting June 12, 2023.
New lumpsum investments, including switch-ins, will no longer be accepted by the fund, a release from HDFC Mutual Funds said. However, new Systematic Investment Plan (SIP) registrations under the monthly frequency will still be allowed but limited to Rs. 10,000 per investor (aggregated at the PAN level of the first holder). The fund will not register any new Systematic Transfers (STPs) into the scheme.
All systematic transactions registered before the effective date will continue to be processed. Additionally, there will be no restrictions on redemptions for investors who wish to exit their positions.
Typically fund houses restrict subscriptions in the scheme when they do not find enough opportunity to deploy the cash. This practice is employed to maintain the overall investment strategy and protect the interests of existing investors.
This happens in two scenarios. One is when a fund house experiences a surplus of cash inflows due to high demand from investors, especially when the fund is outperformed in the category, and it becomes difficult for the fund manager to deploy the cash. The other scenario emerges when the investment universe is limited, and the fund manager cannot find attractive investment opportunities within the desired investment universe; it can lead to difficulties deploying the excess cash.
Why Restrictions?
HDFC Defence is going through the second scenario. It is a thematic fund and predominantly invests in defence and allied sectors such as aerospace and shipbuilding. As per the scheme document from HDFC Mutual Fund, the fund is classified as in the “very high-risk category”. Says HDFC Mutual Fund: “Defence as a sector sees a constant need to modernise its platforms due to its strategic relevance for the country and technological advancements.
“Through initiatives like Make in India, government policies remain conducive to the growth of the defence sector in the country. HDFC Defence Fund will seek to invest in companies with good quality management with demonstrated track record and aim to achieve diversification by following a multi-cap strategy. The Fund’s focus would be on growth and quality at reasonable valuations by investing across large, mid and small-cap stocks.”
The fund is benchmarked against the Nifty India Defense Index. The index has 13 stocks. If you look at returns, they have moved up sharply in the last year. The average return from the top ten stocks of the index constituents stands at 91 per cent. Three stocks of the portfolio have delivered above 100 per cent returns Mazagon Dock (275 per cent), Data Patterns (147 per cent), and Garden Reach (105 per cent).
Considering this sharp run-up in the space, stocks seem expensive for the fund manager to deploy the fresh money in them. Existing investors bullish on growth opportunities may continue to remain invested. And if you want to deploy fresh capital, wait till the restrictions are lifted or opt for the SIP route.
