Global Conflicts Heating Up: 3 Defence Mutual Funds to Add to Your Watchlist

#2 HDFC Defence Fund

HDFC Defence Fund is a new scheme, launched on 2 June 2023. It is an open-ended thematic defence equity scheme with an AUM of Rs 77.94 bn.

The scheme seeks to generate long-term capital appreciation by investing predominantly in equity and equity-related securities of defence and allied-sector companies.

The scheme expense ratio (direct plan) is 0.82%. The fund currently has about 98% of its portfolio invested in equities, with the remaining 2% held in cash and cash equivalents. The fund holds 54% in largecaps, followed by smallcaps (27.38%) and midcaps (18.61%).

Industrials accounted for 61.22%, followed by consumer discretionary (17.81%), materials (13.66%), and technology (5.31%).

The fund holds a concentrated portfolio of 23 stocks, with the top 5 stocks constituting 62.65% of the portfolio. Holdings include Bharat Electronics (19.49%), Hindustan Aeronautics (13.63%), Bharat Forge (12.32%), Solar Industries (10.64%), and BEML (6.57%).

Other defence holdings include Bharat Dynamics (5.92%), Astra Microwave (5.19%), Premier Explosives (3.02%), MTAR Tech (3.01%), and Mazagon Dock (2.95%).

The scheme follows a buy-and-hold strategy, as indicated by a portfolio turnover ratio of 0.16. The scheme is highly volatile, with a standard deviation of 28.77 compared with the benchmark's 12.26.

The scheme outperforms the benchmark (0.53) in mitigating drawdowns, with a Sortino of 0.75.

That is why, with a Sharpe ratio of 0.33 against the benchmark's 0.27, the fund also outperforms on a risk-adjusted basis. This helps the fund outperform the benchmark. The fund has delivered an absolute return of 14.97% (1-year), outperforming the benchmark Nifty 500 TRI (4.89%).

#3 HSBC Infrastructure Fund

HSBC Infrastructure, launched in September 2007, is an open-ended thematic equity scheme focused on the infrastructure sector.

The fund follows a investment approach anchored in fundamental research. It focuses on scalable businesses with strong profitability, reasonable valuations, proven management, and good financials.

Stock selection is driven by proprietary research using a mix of quantitative and qualitative filters.

Companies are evaluated on business quality, ESG factors, and valuation, with portfolio construction aligned to a predefined risk framework.

As of 31 January 2026, the fund's AUM was Rs 21.98 bn, and the expense ratio (direct plan) is 0.99%. The scheme is almost fully invested with 98.65% equity allocation. Large-cap accounts for 62.42% of the portfolio, followed by small-cap (24.64%) and mid-cap (12.93%).

In sector allocation, the construction sector accounts for 50.31%, followed by energy and utilities (21.74%), materials (10.92%), technology (7.16%), and consumer discretionary (2.75%). The fund holds 54 stocks, with the top 10 accounting for 54.73% of the portfolio.

NTPC has the highest weight of 9.82%, followed by BEL (8.27%), L&T (7.37%), Bharti Airtel (7.16%), and Reliance Industries (6.71%).

Hindustan Aeronautics (3.77%) and MTAR Tech (1.9%) are the other defence stocks in the scheme's portfolio as of January 2026.

The scheme's PE multiple is 24.75, which is almost in line with the benchmark Nifty 500 (22.8). The portfolio turnover ratio is moderate at 0.21, indicating a little churn strategy.

With a standard deviation of 17.81, the scheme's volatility exceeds the benchmark's (12.25).

The fund performs slightly better in managing drawdowns, with a Sortino ratio of 0.57 against the benchmark (0.53). The Sharpe ratio (0.30) is higher than the benchmark (0.27), indicating the fund has outperformed the benchmark on a risk-adjusted basis.

This helps it report better performance. With a 5-year CAGR of 29.50%, the fund has outperformed the benchmark Nifty 500 TRI (20.67%).

Bottomline

India's defence sector is witnessing steady structural tailwinds driven by higher capital expenditure, increasing domestic procurement, and a growing export pipeline.

Defence-oriented mutual funds allow investors to participate in this evolving theme through a diversified portfolio of companies linked to the sector.

However, these remain sectoral funds and their performance can be cyclical and volatile.

Thus, investors should evaluate their risk tolerance, investment horizon, and portfolio allocation before considering any investment.

#Table Note: Data as of 5 March 2026
Rolling period returns are calculated using the Direct Plan-Growth option.
Returns over 1 year are compounded annually.
Standard Deviation indicates risk, while the Sharpe ratio and Sortino ratios measure risk-adjusted return.
They are calculated over 3 years, assuming a risk-free rate of 6% p.a.
The category average of all midcap mutual funds considered.
Please note that the returns here are historical.
The funds listed at the top of the table are ranked by 5-year returns. The list of schemes is not exhaustive.
Past performance is not an indicator of future returns.
The securities quoted are for illustration only and are not recommendations.
Speak to your investment advisor for further assistance before investing.
Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully.

Disclaimer: This write-up is for information purposes and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks. Read all scheme-related documents carefully. Registration granted by SEBI, Membership of BASL, and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.