The Groww Nifty India Defence ETF Fund of Fund (FOF) has gained significant attention among investors, both small and large, due to India’s increasing focus on its defense sector. As the Indian government continues to push for self-reliance under the Atmanirbhar Bharat initiative, defense manufacturing and related sectors are set to see significant growth. This analysis dives into the ETF’s structure, its potential for investors, and the risks involved.
1. Fund Overview
Groww Nifty India Defence ETF FOF is a passively managed fund that invests in the Nifty India Defence Index, which tracks the performance of companies involved in defense-related activities in India. As a Fund of Fund, it invests primarily in ETFs (Exchange-Traded Funds) holding defense sector stocks, making it accessible to a wider range of investors by pooling resources into a diverse selection of defense companies.
2. Defense Sector in India: A Growing Opportunity
India has the third-largest military in the world, and its defense budget is among the top five globally. The Indian government’s push toward defense modernization, coupled with its ambitious Make in India initiative, has opened up a huge growth window for companies in this sector. Furthermore, the Union Budget for FY 2024-25 allocated ₹5.94 lakh crore for defense, with a significant portion dedicated to capital outlay for defense services and defense production.
This massive budget allocation is a direct indicator of the growth potential in India’s defense sector, making ETFs like Groww Nifty India Defence ETF FOF an attractive option for investors aiming to capitalize on the government’s long-term commitment to enhancing domestic defense capabilities.
3. Performance Outlook and Potential for Returns
The defense sector has historically been less volatile than other industries due to its stable and government-backed demand. With increased geopolitical tensions and global supply chain disruptions, defense companies are expected to benefit from both domestic and international orders.
The Groww Nifty India Defence ETF FOF holds stocks of companies such as Hindustan Aeronautics Limited (HAL), Bharat Electronics Limited (BEL), and Bharat Dynamics Limited (BDL), which are key players in India’s defense landscape. Historically, these companies have shown strong performance, with HAL posting a 49% growth in revenue in FY 2022-23, while BEL’s net profit grew by 18.7% in the same period. These companies are expected to continue seeing growth as India becomes more self-reliant and looks to export defense equipment to allied nations.
4. Risk and Volatility Factors
While the defense sector is a high-growth area, there are certain risks to consider:
- Government Policy Dependency: The defense sector in India is heavily influenced by government policy and budgetary decisions. Any significant reduction in defense spending could directly impact the profitability of companies in this ETF.
- Geopolitical Risks: While geopolitical tensions can drive demand for defense products, they also carry inherent risks. A prolonged conflict or major shift in international relations could disrupt supply chains or lead to market instability.
- High Competition: With increasing private sector participation in India’s defense industry, competition among companies could intensify. While this is good for innovation and cost-effectiveness, it might squeeze profit margins for established players.
5. Expense Ratio and Liquidity
One of the main factors to consider when investing in an ETF is the expense ratio. The Groww Nifty India Defence ETF FOF has a competitive expense ratio of approximately 0.50%, making it a low-cost option for both small and large investors. The fund’s liquidity is generally strong, as it holds a diverse set of high-performing companies with significant market capitalization, ensuring that investors can buy or sell units without major price fluctuations.
6. Why This ETF is Suitable for Small and Large Investors
For small investors, this ETF offers a low-cost entry into a sector that would otherwise require large capital investments to access the top-performing defense companies. Through this FOF, retail investors can diversify their portfolios with exposure to the defense sector without the need for significant market knowledge or large sums of money.
For large investors, the defense ETF provides a robust avenue for hedging against market volatility, as defense stocks tend to perform well even during times of economic downturns. The long-term government contracts and stable demand for defense equipment ensure that large investors can expect steady returns, making this ETF a relatively safe addition to a diversified portfolio.
7. Performance Relative to Market Benchmarks
Since its inception, the Groww Nifty India Defence ETF FOF has shown promising returns compared to traditional market benchmarks. While broader indices like the Nifty 50 have been subject to volatility driven by sectors such as IT and financial services, defense stocks have maintained steadier growth. Over the last year, defense sector stocks have outperformed the Nifty 50 by approximately 12-15%, indicating that the ETF has the potential to deliver higher returns than general market trends in the medium to long term.
8. Future Growth Drivers
Several key drivers are expected to propel the defense sector and, by extension, this ETF in the coming years:
- Indigenization and Exports: India aims to increase defense exports to ₹35,000 crore by 2025, significantly boosting revenues for companies involved in manufacturing and R&D.
- Technological Advancements: Defense companies in India are increasingly focusing on high-tech segments such as unmanned aerial vehicles (UAVs), cyber defense, and artificial intelligence, which will attract new investments.
- Increased Private Sector Participation: With more private companies entering the defense sector, the overall industry is expected to become more competitive and innovative, further driving growth.
Conclusion: Is It Worth Investing In?
The Groww Nifty India Defence ETF FOF is a compelling investment opportunity for both small and large investors. It offers diversification into a stable, high-growth sector with strong government backing. For those looking to invest in India’s future defense capabilities, this ETF provides a balanced mix of growth potential and risk mitigation.
Small investors can benefit from low entry costs, while large investors can enjoy steady returns with relatively lower volatility. However, as with any investment, potential investors should carefully consider their risk appetite and investment horizon, particularly given the dependence on government policy and international geopolitical factors.
In conclusion, the Groww Nifty India Defence ETF FOF stands as a promising option for those looking to tap into the booming defense sector in India, with both short-term gains and long-term growth potential.
