Defence Mutual Funds in India- Should you invest now?

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Defence Mutual Funds: A Study and Future Prospects 


Defence mutual funds in India – investment guide with growth potential and defence sector theme


by Rajeev Pathak

In the last 3–4 years, defence mutual funds in India have moved from obscurity to the spotlight. Early investors in New Fund Offers (NFOs) have indeed witnessed multi-bagger returns (200–250% in some cases), driven by structural policy shifts, geopolitical tensions, and a strong rally in defence stocks.

But the critical question for investors today is the following:

Is the rally sustainable? And should you invest now?

This article explores performance, available funds, and future prospects—along with practical recommendations.

 

What Are Defence Mutual Funds?

Defence mutual funds are sectoral/thematic equity funds that invest primarily in:

  • Defence manufacturing companies
  • Aerospace firms
  • Shipbuilding and explosives
  • Defence electronics and engineering

These funds typically track or benchmark against the Nifty India Defence Index, which represents leading defence-related companies in India. (Pocketful.in)

 

Performance of the Defence Index

The backbone of defence mutual funds is the Nifty India Defence Index, and its recent performance explains the hype.

Key Performance Metrics (as of early 2026):

  • 1-year return: ~59.3%
  • 3-year CAGR: ~57.9%
  • 5-year CAGR: ~55.6% (Axis Mutual Fund)

This is extraordinary compared to broader indices.

Why Such Strong Performance?

  1. Government Push
    • “Make in India”
    • “Atmanirbhar Bharat”
    • Rising defence budgets
  2. Geopolitical Tensions
    • Global conflicts and regional tensions boost defence demand
  3. Export Growth
    • India is becoming a defence exporter
  4. Limited Competition

But There’s a Catch

  • Volatility: ~27% vs ~14% for broader indices
  • High dependence on government policies

👉 In simple terms:
High return means High risk

 

Performance of Defence Mutual Funds

Defence funds have mirrored the index rally.

Recent Returns (2025–2026)

  • Motilal Oswal Nifty India Defence Index Fund: ~20–20.25% (1-year)
  • Aditya Birla Sun Life Defence Index Fund: ~19–20%
  • Defence funds surged up to 21% post Budget 2025 (Groww)

Earlier phases (2023–2024) saw even sharper rallies, explaining the ~250% gains in early NFO investors.

 

Major Defence Mutual Funds in India

Currently, the defence mutual fund universe is small but growing.

Major Available Funds

  1. HDFC Defence Fund (Active)
  2. Motilal Oswal Nifty India Defence Index Fund (Passive)
  3. Aditya Birla Sun Life Nifty India Defence Index Fund
  4. Groww Nifty India Defence ETF FoF
  5. Axis Nifty India Defence Index Fund (recent NFO) (smallcase)

Key Observations

  • Most funds are index-based (passive)
  • Very few actively managed funds exist
  • Expense ratios are relatively low in passive funds

 

Why Defence Funds Became So Popular

1. Policy Tailwinds

India’s defence budget continues to expand, touching the ~₹6.8 lakh crore range in recent years. (Axis Mutual Fund)

2. Structural Story

  • Import substitution
  • Indigenous manufacturing
  • Private sector participation

3. Strong Order Books

Defence companies often have multi-year contracts, giving earnings visibility.

 

Defence mutual funds India infographic showing performance, risks, returns, and investment strategy

Future Prospects of Defence Mutual Funds

Positive Triggers

✔ Long-Term Demand
Global defence spending is unlikely to decline anytime soon

✔ Export Opportunity
India aims to become a major exporter

✔ Technology Push
AI, drones, missiles, space defence

✔ Limited Competition
Entry barriers protect margins

 

Risks to Watch

Overvaluation Risk
After a sharp rally, many stocks are expensive

Policy Risk
Change in government priorities can impact sector

Execution Delays
Defence projects often face delays

Sector Concentration
Not diversified → high downside risk

Experts clearly caution that sectoral funds should not form the core portfolio. (The Economic Times)

 

Should You Invest in Defence Mutual Funds Now?

The Balanced View

YES, if:

  • You have high risk appetite
  • You believe in India’s defence growth story
  • You have a long-term horizon (5–10 years)

NO / BE CAUTIOUS, if:

  • You are a beginner
  • You want stable returns
  • Your portfolio lacks diversification

 

Our view:

Suggested Strategy –

  • Allocate 5%–10% maximum of your portfolio
  • Prefer SIP over lump sum (due to volatility)
  • Combine with diversified equity funds
  • Consider phased investing after corrections

Ideal Approach –

Investor Type

Strategy

Conservative

Avoid

Moderate

Small allocation (5%)

Aggressive

Tactical allocation (10%)

 Popular post – SIP Investing- the Ultimate Guide

Conclusion:

Defence mutual funds are not just a trend—they represent a structural opportunity backed by policy and global demand.

However, the easy money phase may already be over. Going forward, returns may be:

👉 More moderate
👉 More volatile
👉 More dependent on execution

👉 More dependent on world peace and war situations

Smart investors will treat defence funds as a satellite allocation—not the core portfolio.

 

About Author

Rajeev Pathak, the author of this article, is an AMFI-registered mutual funds distributor (ARN-116642). He may be reached by email to boirajeev@gmail.com

Disclaimer:

This article is for educational and informational purposes only and should not be construed as investment advice. Mutual fund investments are subject to market risks. Past performance is not indicative of future returns. Please consult your financial advisor before making any investment decisions.

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