In a dramatic rally that has captured the attention of both retail and institutional investors, mutual funds focused on India’s defence sector have delivered returns of up to 60% in just three months, riding on a wave of government push for self-reliance, robust order books of key players, and a bullish sentiment around the Make in India initiative.
Defence: The New Star Performer
From being a niche thematic play to becoming one of the most watched sectors on Dalal Street, defence manufacturing stocks and related mutual fund schemes have seen a meteoric rise in investor interest. Funds like HDFC Defence Fund, ICICI Prudential BHARAT Defence Fund, and SBI Defence Fund have posted returns ranging from 45% to 60% between February and May 2025, outperforming broader indices and other sectoral themes.
What’s Fueling the Surge?
Several macro and policy-level developments have contributed to this rally:
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Government CapEx Boost: The Union Budget for FY26 has earmarked over ₹6.2 lakh crore for defence, with nearly ₹1.7 lakh crore specifically allocated for capital acquisitions.
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Atmanirbhar Bharat Drive: More than 400 defence items have been moved to the import ban list, giving a direct boost to domestic manufacturers.
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Strategic Collaborations and Exports: Defence PSUs like Hindustan Aeronautics Ltd (HAL) and Bharat Electronics Ltd (BEL) have signed international contracts and reported record-high order books and revenues.
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Private Participation: Companies like Data Patterns, Paras Defence, and Astra Microwave have seen significant re-ratings, driven by earnings upgrades and improved visibility.
Mutual Fund Bets
HDFC Defence Fund, launched just last year, has already amassed a corpus of over ₹2,000 crore. The fund has significant exposure to stocks like HAL, BEL, Bharat Dynamics Ltd (BDL), and private players like MTAR Technologies and Solar Industries.
Similarly, ICICI Prudential BHARAT Defence Fund, launched in early 2024, now boasts strong returns and a growing SIP book. Fund managers believe the sector is at an inflection point, with multi-year earnings visibility and structural tailwinds.
Will the Rally Sustain?
While the short-term returns are impressive, experts urge caution. “There is a lot of euphoria around defence right now, and while the long-term story is intact, valuations in certain pockets are getting stretched,” says Amit Jain, Fund Manager at a leading AMC.
According to analysts at Motilal Oswal, HAL is trading at 40x its trailing 12-month earnings, significantly above its 5-year average. However, they maintain a bullish stance on BEL and BDL, citing strong order flows and competitive advantage.
Retail Investors Should Tread Carefully
For retail investors, the question is whether to enter now or wait for a correction. Financial advisors suggest a staggered SIP approach in defence-focused mutual funds rather than lump sum investments.
“The sector has long-term potential given India’s geopolitical stance, increasing defence exports, and technology advancements. But investors should moderate their return expectations and align their investment horizon with a 5–7 year view,” advises Neha Mahajan, Certified Financial Planner.
A Long-Term Theme
Defence is slowly moving from being a cyclical, high-risk sector to a core part of India’s strategic and economic policy. With the global geopolitical environment still uncertain and India’s ambition to become a top defence exporter, the sector has significant growth headroom.
But as with all thematic funds, volatility remains high. Investors are advised to consult with financial advisors, review fund portfolios, and assess their risk appetite before betting big on the defence theme.
Disclaimer: Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing.