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The defence industry stands out among industries that offer resilience and development potential as a result of rising global tensions and geopolitical unpredictability. India is not an exception to the global trend of rising military spending relative to GDP. The industry is expanding at a rate never seen before due to the government's emphasis on domestic production, large-scale defence projects, and self-reliance programs like ‘Atmanirbhar Bharat.
Defence sector mutual funds give investors the chance to take part in this potent long-term trend.
What are defence sector mutual funds?
Mutual funds in the defence industry mostly invest in businesses engaged in government contracts, aerospace, technology, and defence manufacturing. They want benefits from modernisation, increased defence spending, and sustained policy backing. They have significant growth potential as sector-focused funds, but they also come with regulatory and concentration hazards.
Why are Defence Stocks & Mutual Funds gaining popularity in India?
The government's strong drive for Make-in-India, growing defence expenditures, and the quick modernisation of military capabilities are all contributing to the growth of defence funds in India. Growing domestic output and escalating geopolitical tensions have improved the sector's long-term growth prospects. Investors view the industry as a high-potential opportunity as order books grow and new defence technology appears.
Whenever nations raise military spending and expedite defence procurement, global tensions frequently improve the performance of defence industry funds. Defence industries' order books are strengthened by increased demand for innovation, technology, and equipment. Long-term hostilities, however, can also raise investment volatility and geopolitical risk.
A few ‘Sector Mutual Funds’ you can consider:
- Aditya Birla SL Nifty India Defence Index Fund
- Motilal Oswal Nifty India Defence Index Fund
- HDFC Defence Fund
Performance: (NAV as of 16.01.2026)
|
Scheme |
Returns % p.a. 1 Year |
|
Aditya Birla SL Nifty India Defence Index Fund (Regular) |
24.55% |
|
Motilal Oswal Nifty India Defence Index Fund (Regular) |
24.05% |
|
HDFC Defence Fund (Regular) |
17.60% |
Major companies in their portfolio are listed below:
- Bharat Electronics Ltd (BEL)
- Hindustan Aeronautics Ltd (HAL)
- Bharat Forge Ltd
- Solar Industries India Ltd
- Bharat Dynamics Ltd
- Cochin Shipyard
- Bharat Dynamics
- Mazagon Dock Shipbuilders
- BEML Ltd
Want a personalised review of your Defence stock exposure? Book a free consultation
What are the things to Look Out for While Investing in Defence Sector Funds?
Investing in mutual funds related to the Indian defence sector can be quite profitable, but it requires a methodical and knowledgeable approach. Government regulations, contracting cycles, and geopolitical dynamics all have a big impact on the defence industry and can have a big impact on profits.
Understanding the policy risks, defence budgets, and overall market cycles is essential before investing.
As a result, it's crucial to evaluate the fund's portfolio composition before investing to make sure it has a diverse range of defence companies from industries like aerospace, shipbuilding, and defence electronics. More stability and steady growth prospects are typically provided by funds with greater exposure to both PSU and private defence industry companies.
Being a sectoral fund, make sure your investment horizon and volatility tolerance align with the fund's risk profile. Mutual funds in the Indian defence industry can yield higher returns, but they are best suited for patient investors who have a strategic mindset and have faith in the country's growing defence manufacturing sector.
What are the Risks & Considerations?
A sectoral fund, there will be high Volatility in your portfolio. The sector has a huge impact of policy change in the government, global events, and investor sentiments.
There is a concentration risk in sector/ thematic funds that concentrate your investment in one sector, increasing risk.
If a particular sector performs better than other sectors, many investors, in order to earn better returns, chase the same companies. In some cases, there is a high chance of speculation. The valuation of the companies becomes very high as large amounts of money inflows to the same set of companies as compared to their earning potential. It leads to the Valuation trap for small retail investors.
Sectoral/thematic mutual funds are generally not for conservative investors. They are suitable for high-risk appetite investors.
Conclusion:
In 2025, the defence industry will have become one of the most resilient and opportunity-rich sectors for investors. The expansion of India's defence ecosystem has been hastened by the country's growing defence budget, robust policy push for indigenisation, and major defence projects under Atmanirbhar Bharat.
If defence spending, modernisation, and technological upgrades continue to grow, Defence sector funds can be good long-term investments for high-risk appetite investors (a small part of their overall portfolio for diversification).
This article was just published on TaxGuru Click here to read - Tax Implications of Investing in FDs, MFs, PMS and AIFs
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