Defence funds offer a compelling opportunity for investors seeking to capitalise on a structural growth theme with long-term compounding potential. As these funds carry higher concentration risk, a 5–10% allocation in the overall equity portfolio would be ideal, balancing growth potential with prudent diversification.
The Nifty India Defence TRI has surged around 30% in the last one month and 60% in the previous three months,
significantly outperforming the broader indices. The four thematic mutual funds focusing on defence collectively manage over Rs 10,000 crore in assets under management now, up from under Rs 1,500 crore a year ago.
Soumya Sarkar, co-founder, Wealth Redefine, says this sector depends on government policies and big projects, and it takes time to grow. “Start by putting a small part of your portfolio into these funds through systematic investment plans. Stick to funds with a good track record, and stay invested for at least five years to ride out short-term ups and downs,” he says.
Gaining traction
Defence funds are gaining traction due to a confluence of structural tailwinds: a sharp rise in India’s defence capital outlay, indigenisation through Atmanirbhar Bharat, and strong order books of listed defence PSUs. In FY25, India’s defence budget allocation touched Rs 6.2 lakh crore, up 13% year-on-year. The recent India–Pakistan conflict and persistent tensions with China have sharpened the focus on defence preparedness.
Concentration risks
Concentration risk is inherent as these funds are focused on a singlesector. Policy reversals, project execution delays, or global geopolitical shocks can impact returns. “Understanding fund strategy, portfolio composition, and key holdings is essential,” says Nirav Karkera, head, Research, Fisdom.
Satellite portfolio
Defence funds fit well in a satellite portfolio since they add high-growth potential but come with higher risk. As the sector has seen a sharp rally recently, valuations are a bit stretched. Valuations in the sector have re-rated sharply — several stocks in the Nifty India Defence Index are now trading at 40–50x earnings, which is elevated relative to historical averages.
Tactical investors may go for a staggered approach or wait for corrections, especially as execution risk and order book realisations catch up with market expectations. Sonam Srivastava, founder, Wright Research, says defence is a structural theme with geopolitical and policy tailwinds and is cyclical due to the nature of order execution and budget allocations. “Allocation should be part of the satellite portfolio — not exceeding 5–10% of total equity exposure — given the sectoral concentration and the sharp rally already priced in,” she says.
With only four defence funds available, investors must focus on risk appetite and track record. While HDFC Defence Fund is an active fund, Motilal Oswal Nifty India Defence Index Fund, Aditya Birla SL Nifty India Defence Index Fund and Groww Nifty India Defence ETF are passive funds. Risk-tolerant investors seeking alpha may consider HDFC Defence Fund. Those preferring cost-efficiency and market-linked returns may opt for index funds or ETFs. Check if the fund you are investing in has spread its bets across shipbuilders, aircraft makers, and tech firms.