Last Updated:
Defence sector-based mutual funds have witnessed a sharp rally, delivering up to 60% returns in the last three months
Defence Mutual Funds Rally Up to 60% in 3 Months
Defence sector-based mutual funds have witnessed a sharp rally, delivering up to 60% returns in the last three months. There are around six mutual fund schemes in this category, comprising both active and passive funds, that have given an average return of 57.70% during this period.
Top Performing Defence Mutual Funds
Three schemes in the category have posted returns of over 60%.
- Motilal Oswal Nifty India Defence ETF delivered the highest return of 60.49%.
- Motilal Oswal Nifty India Defence Index Fund followed with a 60.23% return.
- Groww Nifty India Defence ETF and Aditya Birla SL Nifty India Defence Index Fund recorded 60.12% and 59.96% returns, respectively.
- Groww Nifty India Defence ETF FOF also performed strongly with a 59.45% return.
Among actively managed funds, HDFC Defence Fund—the only one in this segment—gave a notable return of 45.93%.
What’s Fueling the Rally?
Experts attribute the surge to a mix of strong quarterly earnings, government policy support, and increased capital allocation to defence. Additionally, recent geopolitical tensions, including the India-Pakistan face-off, have acted as a catalyst. “Key holdings in defence index funds reported strong earnings growth. With a sharp focus on indigenisation, the FY25 defence budget allocated Rs 1.72 lakh crore in capital outlay. Defence exports surged 12% YoY to Rs 21,083 crore in FY24,” said Atul Shinghal, Founder & CEO of Scripbox.
He noted that the rally was driven by earnings momentum, policy tailwinds, and improved global perception of India’s defence manufacturing.
6-Month Returns Also Impressive
In the past six months, passive defence funds continued their upward trajectory:
- Motilal Oswal Nifty India Defence ETF returned 34.22%.
- Motilal Oswal Nifty India Defence Index Fund returned 33.73%.
- Groww Nifty India Defence ETF FOF gained 33.35%.
- HDFC Defence Fund delivered a more modest 15.86% return.
Should You Invest in Defence Funds Now?
Despite the strong performance, many experts advise caution. Shinghal warned that current valuations are stretched, with the Motilal Oswal Nifty India Defence Index trading at a P/E of 61.35x and P/B of 13.22x, well above the broader market. “The Sharpe Ratio is negative (-0.07), indicating poor risk-adjusted returns despite high absolute gains. Also, the index has a 77.5% allocation to mid and small-cap stocks, making it vulnerable during risk-off periods,” he added.
Investment Strategy for Defence Funds
Shinghal suggests the following strategy:
- Existing investors: Hold positions and book profits in a staggered manner.
- New investors: Avoid fresh lump-sum investments.
- SIP strategy: Consider tactical SIPs only after a 10–15% correction.
- Keep exposure to defence sector funds limited to 2–4% of your total equity allocation.
Expert View: Tactical Bets for Seasoned Investors
Naik, another market expert, points out that thematic funds like defence are best suited for seasoned investors who already have their core portfolios in place. “Many defence stocks have rebounded and are now near their all-time highs. While the long-term outlook remains robust, valuations suggest caution before entering at current levels,” Naik said.
Outlook
While the long-term story of India’s defence sector remains strong, experts believe the current rally has priced in much of the expected growth. Investors are advised to book profits, maintain moderate exposure, and re-enter only after meaningful corrections.
As always, investment choices should align with your risk appetite, financial goals, and investment horizon.
- First Published:
