Indian defence stocks have been among the most talked-about trades of the past three years, and the reasons are structural.
Import substitution, a rising domestic procurement budget, export ambitions, and a policy push toward indigenous manufacturing have given the sector a long runway. The natural question for anyone who does not want to pick individual stocks is which mutual fund to use.
But the answer is very narrow than most people expect. India currently has only one dedicated defence mutual fund.
Beyond that, defence exposure is found in mutual funds built for something else.
When we screened all funds for high exposure to defence sector, we found two other schemes with meaningful defence holdings. One fund holds nearly three-quarters of its portfolio in defence companies. The other two hold roughly a seventh and a fifth.
#1 HDFC Defence Fund
HDFC Defence Fund is the only pure play defence mutual fund in India. Most people would stumble across this one when they search or talk about defence funds.
Look at its holdings:
| Holding | Weight | What it makes |
|---|---|---|
| Bharat Forge | 14.82% | Artillery systems, forgings, components |
| Bharat Electronics | 14.67% | Radars, electronic warfare, avionics |
| Hindustan Aeronautics | 12.37% | Aircraft, helicopters, engines |
| Solar Industries India | 10.95% | Explosives, ammunition, loitering munitions |
| Astra Microwave Products | 7.16% | Radio frequency and microwave subsystems |
| MTAR Technologies | 4.01% | Precision components |
| Bharat Dynamics | 3.80% | Missiles and guided weapons |
| Mazagon Dock Shipbuilders | 3.34% | Warships and submarines |
| Premier Explosives | 2.89% | Solid propellants and explosives |
| Cochin Shipyard | 0.40% | Shipbuilding. A new addition this quarter |
Data Source: Ace MF, portfolio as of July 2026
The fund’s portfolio is concentrated: the top four holdings alone account for 52.8% of assets, and the whole defence sleeve is 74.4%. The composition also spans the sector properly, covering platforms, electronics, munitions, precision components, and shipbuilding.
Cochin Shipyard is a new entry this quarter at a starter position of 0.4%, which usually signals the beginning of a build.
The returns of this fund look excellent at first glance. Over one year the fund returned 36.78% and over three years 37.53% on a compound basis.
Let’s also compare them with the index the fund is measured against.
It beat the Nifty India Defence TRI by 3.45 percentage points over one year. Over two years it lagged by 0.56 points. Over 3 years it lagged by 6.37 points, returning 37.53% against the index at 43.9%.
Other Two Funds with High Exposure to Defence
The other two funds are Invesco India PSU Equity fund and HSBC Infrastructure fund.
| Scheme | Category | Defence holdings | Defence weight |
|---|---|---|---|
| Invesco India PSU Equity Fund | Thematic | 4 stocks | 19.2% |
| HSBC Infrastructure Fund | Infrastructure | 3 stocks | 13.6% |
Data Source: Ace MF, scheme portfolios as of July 2026
Now let’s see how these compare with the benchmark as this is where the picture gets complicated.
| Scheme | Its benchmark | Fund | Index |
|---|---|---|---|
| Invesco PSU Equity, 1 year | Nifty PSE TRI | 7.05 | 5.18 |
| Invesco PSU Equity, 3 years | Nifty PSE TRI | 19.60 | 20.01 |
| Invesco PSU Equity, 5 years | Nifty PSE TRI | 21.34 | 24.31 |
| HSBC Infrastructure, 1 year | Nifty Infrastructure TRI | 13.81 | 2.77 |
| HSBC Infrastructure, 5 years | Nifty Infrastructure TRI | 18.99 | 14.71 |
| HSBC Infrastructure, 7 years | Nifty Infrastructure TRI | 21.40 | 18.44 |
Invesco India PSU Equity Fund shows a similar pattern like HDFC in milder form. It beat the Nifty PSE TRI over 1, 2, and 7 years, and lagged over 3 and 5 years. The 5-year gap is 2.97 percentage points.
HSBC Infrastructure Fund is the only one of the three to beat its benchmark over every period measured, and by wide margins: 11.04 percentage points over 1 year, 4.28 over 5 years and 2.96 over 7 years. On returns alone it’s the standout.
What the Returns Cost in Volatility
Returns without risk figures are half a story, so let’s see their volatility.
| Scheme and benchmark | Volatility | Sharpe | Sortino |
|---|---|---|---|
| HDFC Defence Fund | 28.57 | 0.33 | 0.74 |
| Nifty India Defence TRI | 33.91 | 0.33 | 0.82 |
| Invesco India PSU Equity Fund | 21.14 | 0.24 | 0.52 |
| Nifty PSE TRI | 22.03 | 0.23 | 0.56 |
| HSBC Infrastructure Fund | 19.37 | 0.19 | 0.38 |
| Nifty Infrastructure TRI | 15.33 | 0.21 | 0.40 |
Data Source: Ace MF, for the period 8 September 2023 to 8 September 2026
HDFC Defence Fund carries a standard deviation of 28.57, far above what a diversified equity fund would show, though notably below its own benchmark at 33.91. This means the fund has delivered its returns with meaningfully less turbulence than the defence index itself.
HSBC Infrastructure Fund inverts that. It beat its benchmark on every return period, but did so with higher volatility, at 19.37 against 15.33, and a lower Sharpe ratio, at 0.19 against 0.21.
Invesco India PSU Equity Fund is the most balanced of the three, with volatility slightly below its index and a Sharpe ratio marginally above it.
Which Route Suits Which Investor
If you want defence and only defence, HDFC Defence Fund is the only option, and at 74.4% sector weight it delivers what it says.
If you want defence as part of a broader industrial and capital goods exposure, HSBC Infrastructure Fund gives you 13.6% in defence alongside the rest of the infrastructure complex.
If you want defence within a state-owned enterprise theme, Invesco India PSU Equity Fund holds 19.2% in defence, all of it in public sector names such as Hindustan Aeronautics, Bharat Electronics, Bharat Dynamics, and Mazagon Dock.
Key Concerns
The first is concentration. A sector fund holding 74% in one theme has no diversification to fall back on. When defence stocks corrected sharply in 2025, funds like this fell with them, and there was nothing else in the portfolio to cushion it.
The second is valuation. Indian defence stocks have re-rated substantially, and several of the names in these portfolios trade at multiples that assume years of order execution going exactly to plan.
The third is that defence spending is a policy variable. It’s currently rising and the structural case for indigenisation is strong. But procurement decisions, budget allocations and export approvals are all government choices, and they can move faster in either direction.
Conclusion
India has one dedicated defence mutual fund and two mutual funds that hold defence stocks as part of a wider mandate.
So, instead of asking which one to buy, the useful question is how much defence exposure you actually want, and whether you would rather have it neat, diluted within infrastructure, or wrapped inside a public sector theme.
Evaluate the scheme’s investment mandate, the fund manager’s track record, costs, portfolio composition, and your asset allocation and risk tolerance before drawing investment conclusions.
Happy investing.
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