Mutual Fund News : HDFC Mutual Fund Restricts Lumpsum Investments in HDFC Defence Fund Heres Why

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HDFC Mutual Fund launched the new fund offer for the HDFC Defence Fund on May 19, 2023. It is an open-ended equity scheme investing in Defence & allied sector companies. This defence fund is a sectoral scheme with the objective of investing at least 80% of its net assets in equity and equity-related instruments of defence and allied sector companies. As per the HDFC Defence Fund Scheme Information Document (SID), the core portfolio of the fund is supposed to be of listed companies that obtain at least 10% of revenues from defence segment. The Nifty India Defence TRI, which comprises of 13 stocks of defence companies serves as the benchmark for the fund. The HDFC Defence Fund's NFO was originally set to close on June 2, but it ended on May 30, 2023.

However, on Monday June 12, 2023 HDFC Mutual Fund announced the discontinuation of lump sum subscriptions and restrictions on systematic transactions in its recently launched HDFC Defence Fund.

According to the HDFC Mutual Fund Addendum:

  • Fresh lump sum investments (including switch-ins) will be discontinued.

  • Fresh SIP registrations (including SIP top up) only under monthly frequency shall be registered for up to Rs 10,000 per investor (aggregated at first holder PAN level). This means the restrictions on SIP will be applicable on the first PAN holder.

  • No new systematic transfers (STPs) into the scheme shall be registered.

The mutual fund has informed prospective investors with an amendment to the scheme information document that inflows would cease as of June 12, 2023.

HDFC further states that, "Systematic transactions registered prior to the effective date shall continue to be processed. Further, there shall be no restrictions on redemptions. All other terms and conditions, as mentioned in the scheme information document (SID) / key information memorandum (KIM) of the scheme, will remain unchanged."

A mutual fund house restricts inflows into a scheme when they are unable to find enough opportunity to deploy the cash. There are two such incidents:

  • When a fund house receives an excess of cash inflows as a result of significant investor demand, particularly when the fund outperforms its category, and it is challenging for the fund management to employ the funds.

  • When the investment universe is limited, and if the fund manager cannot locate appealing investment possibilities inside the specified investment universe, it may be challenging to deploy the excess cash.

HDFC Defence Fund is currently a victim of the second scenario. It is a thematic fund and predominantly invests only in stocks of defence and allied sectors such as aerospace and shipbuilding. The scheme has a universe of 21 stocks, many of which are mid and small-sized companies.

The fund house's decision to pause fresh inflows in HDFC Defence Fund likely has to do with limited number of defence stocks and stretched valuations. India's defence stocks have surged in the recent past based on expectations of increased procurement by the Indian government. Considering this sharp run-up in the defence space, stocks appear to be expensive for fund managers to invest the new funds in.

In order to preserve the overall investment strategy and safeguard the interests of current investors, HDFC Mutual Fund has taken this action. Existing investors who are keen on potential growth of the sector may continue to remain invested. And if one wants to deploy new cash, they should either wait until the restrictions are released or use the SIP option.