Best Defence Sector Mutual Funds in India

India's defence industry is strategically vital for the country. Persistent border disputes, terrorism concerns, and internal security threats have strengthened the call for high military preparedness.

For investors, India's defence sector presents a compelling long-term theme.

Many types of companies have room for growth. These could be firms specialising in aerospace, arms manufacturing, surveillance, logistics, next-generation technologies, radar, missile, AI, cybersecurity, and many more.

Both PSUs and private defence players are well-positioned to benefit from sustained government orders as well as export.

Given the tensions flaring between India and Pakistan, all eyes are now on defence-related stocks and mutual funds.

The Nifty India Defence TRI index tracks defence stocks in India. It has gained 32.2% in the last three months. This compares favourably with the Nifty 50 TRI, which is up 11.3%. Defence sector mutual funds have delivered excellent returns to investors.

Here we have listed the top 5 funds under this category, chosen for their sectoral relevance, portfolio quality, and potential to capture long-term growth in India's defence sector.

#1 HDFC Defence Fund

HDFC Defence Fund is India's first mutual fund that invests only in defence-related companies.

It was launched in June 2023 and currently has a corpus of Rs 54.87 billion (bn). It seeks to deliver long-term capital appreciation by investing in defence & allied sector companies' securities.

The scheme holds a portfolio of 22 stocks, wherein 46.14% are largecaps, 34.59% smallcaps, and the remaining 14.52% are midcaps.

HDFC Defence Fund - Top Stock Holdings

Stocks	Allocation %
Hindustan Aeronautics Ltd.	20.34
Bharat Electronics Ltd.	19.34
Solar Industries India Ltd.	14.52
Astra Microwave Products Ltd.	5.53
Premier Explosives Ltd.	2.76

Source: ACE MF

The portfolio is fairly concentrated but diversified enough to capture both large-cap stability and small-cap innovation.

The fund aims to capture the full value chain from heavy engineering and equipment manufacturers to technology-driven defence solution providers.

This makes it an all-weather play on India's military modernization theme.

Apart from this, the category includes two passively managed defence-oriented funds.

#2 Aditya Birla SL Nifty India Defence Index Fund

Theis is a defence sector-specific index fund.

It seeks to mirror the Nifty India Defence Index. It was launched in August 2024 and currently holds an AUM of Rs 4.6 billion (bn).

Since inception, the fund has generated an absolute return of about 18.98%.

The scheme has a portfolio of 18 stocks across market cap of which majority are in largecaps (38.33%) and midcaps (39.15%).

ABSL Nifty India Defence Index Fund - Top Stock Holdings

Stocks	Allocation %
Hindustan Aeronautics Ltd.	19.8
Bharat Electronics Ltd.	18.53
Solar Industries India Ltd.	16.02
Mazagon Dock Shipbuilders Ltd.	9.37
Bharat Dynamics Ltd.	7.04

Source: ACE MF

The top holdings of the fund are all vital pillars of India's defence modernization.

Please note that as an index fund, the scheme's performance is subject to the performance of the underlying Nifty India Defence Index.

#3 Motilal Oswal Nifty India Defence Index Fund

Launched in July 2024, the fund provides investors with an affordable way to invest in India's defence industry. Currently, it has an AUM of Rs 28.75 billion (bn).

The scheme's portfolio comprises a blend of large cap, mid cap and small cap businesses, where the holding pattern and market cap proportion mirrors the underlying index - Nifty India Defence Index Fund.

Motilal Oswal Nifty India Defence Index Fund - Top Stock Holdings

Stocks	Allocation %
Hindustan Aeronautics Ltd.	19.8
Bharat Electronics Ltd.	18.53
Solar Industries India Ltd.	16.02
Mazagon Dock Shipbuilders Ltd.	9.37
Bharat Dynamics Ltd.	7.04

Source: ACE MF

Since inception, the fund has generated an absolute return of about 8.91%. As an index fund, the scheme's performance is subject to the performance of the underlying Nifty India Defence Index.

Moreover, there are some diversified equity mutual funds with a high allocation to defence stocks.

#4 Samco Flexi Cap Fund

Samco Flexi Cap Fund invests across large-cap, mid-cap, and small-cap stocks without any market cap restriction.

This gives the fund flexibility to dynamically allocate capital to high-conviction ideas based on market opportunities.

Incepted in February 2022, the scheme has an AUM of Rs 4.43 billion (bn) presently. The scheme invests in a focused list of around 28 stocks that represents a high-conviction portfolio approach.

As of 30 April, the fund is heavily inclined towards India's defence industry. The overall allocation to defence stocks is around 15.47% of its assets.

The portfolio indicates the fund manager's optimism in the sector's long-term growth prospects.

Samco Flexi Cap Fund - Top Defence Stock Holdings

Stocks	Allocation %
Bharat Electronics Ltd.	6.55
Mazagon Dock Shipbuilders Ltd.	4.47
Bharat Dynamics Ltd.	4
Solar Industries India Ltd.	0.45

Source: ACE MF

#5 Motilal Oswal Large & Mid Cap Fund

Launched in October 2019, Motilal Oswal Large & Mid Cap Fund is designed to capture growth opportunities across established companies and emerging leaders.

Currently it holds an AUM of Rs 91.76 billion (bn).

In recent times, the fund has increased its exposure to India's defence sector. This is a reflection of its strategy to align with long-term structural themes.

The scheme holds a portfolio of 30 stocks with a tactical allocation across market caps to boost returns.

Motilal Oswal Large & Mid Cap Fund - Top Defence Stock Holdings

Stocks	Allocation %
Bharat Dynamics Ltd.	4.26
Bharat Electronics Ltd.	3.9
Hindustan Aeronautics Ltd.	3.52
Kaynes Technology India Ltd.	3.13

Source: ACE MF

The fund's tilt towards defence stocks with a total allocation of 14.81%.

By incorporating high-conviction defence stocks into its portfolio, the fund has positioned itself to profit from this cyclical market trend.

Conclusion

India's defence industry is poised for a multi-decade growth trajectory as the government makes record capital investments in defence purchases.

This produces firm demand for local production, technology improvement, and advanced weapons capabilities, providing constant revenue visibility for defence companies.

In addition, global defence partnerships, rising export orders, and the increasing role of private players are expanding the sector's long-term growth opportunities.

Having said that, the sudden spurt in investor interest has already pushed defence-related stocks up, leading to stretched valuations.

The Nifty India Defence Index, for example, is already quoting a price to earnings (PE) multiple of 57.71 against 22.43 for the broader Nifty 50.

Likewise, its price to book (PB) value is 13.84 against 3.71 for the Nifty 50.

This gap highlights valuation risks in these stocks. Investors will have to keep this in mind while investing in defence mutual funds.

Additionally, investors should remain cautious of any slowdown in defence spending in the future.

A measured assessment of market conditions and valuation levels is essential when considering exposure to defence sector.

Happy Investing!

#Table Note: Data as of April 30, 2025.

Disclaimer: Past performance is not an indicator of future returns. The securities quoted in the table are for illustration only and are not recommendatory.
Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully.
This article is for information purposes only. It is not a recommendation and should not be treated as such.