India’s defence investing theme has moved from being a policy narrative to a measurable investment opportunity.
The Union Budget 2025 has allocated over Rs 6.81 trillion to defence. It’s expected that, in view of rising global tensions, defence expenditure may increase in the 2026 budget.
More importantly, domestic procurement now accounts for close to 75% of defence capital purchases, compared with less than 60% five years ago.
Order inflows for listed defence and aerospace companies have expanded sharply, supported by export targets of Rs 500 billion (bn) by FY30, up from Rs 236.2 bn in FY25.
This structural shift has filtered into equity markets, where defence-linked stocks have delivered outsized returns over the past three years. Asset managers have also launched defence-themed mutual funds to cash in on the defence boom.
These mutual funds have emerged as a preferred way for investors to participate in India’s long-term strategic and manufacturing push.
Let’s take a look at three of them…
#1 Invesco India PSU Equity Fund
Invesco India PSU Equity Fund is a decade-old fund launched in January 2013.
This scheme invests in companies where the Central/State Government(s) have majority shareholding, management control, or the power to appoint the majority of directors.
As of 31 December, the fund manages an Asset Under Management (AUM) of Rs 14.49 bn.
The fund’s expense ratio (direct plan) of 0.9% is a bit high. However, keep in mind that thematic funds generally have higher expense ratios.
The fund currently has about 98.3% of its portfolio invested in equities, with the remaining 1.7% held in cash and cash equivalents.
Stocks that form the top 50% of the total market capitalisation (Giant) account for 45.05% of the portfolio. The stocks that form the next 20% of the total market capitalization (Large) account for 32.23%, followed by mid-cap (15.92%) and small-cap (6.81%).
In terms of sector allocation, the top five sectors accounted for 71.22% of the total allocation. Banks accounted for 20.68%, followed by Aerospace and Defence (18.72%), Power (15.45%), Petroleum Products (10.47%), and Finance (5.9%).
Note that this is not a pure play defence scheme, rather this scheme has a sizeable allocation to aerospace and defence theme.
The top 10 stock holdings accounted for 61.1% of the portfolio. SBI had the highest weighting at 9.41%, followed by Bharat Electronics (8.27%), BPCL (7.2%), Indian Bank (6.69%), and NTPC Green (5.96%).
The fund follows a measured churn strategy, reflected in its low portfolio turnover ratio of 0.36. This indicates a preference for holding positions through the business cycle rather than frequent trading.
With this approach, the fund has delivered a compounded annual growth rate (CAGR) of 17.87% over the last 10 years. This is higher than the 3.44% CAGR of the benchmark – the BSE PSU Total Return Index (TRI) – during this period.
The scheme’s standard deviation is 20.48, the Sharpe is 0.32, and the Sortino ratio is 0.72.
The Sharpe ratio measures the return a fund generates per unit of total risk. A higher ratio indicates better risk-adjusted performance.
Sortino measures return earned per unit of downside risk. Standard Deviation indicates how much a fund’s returns fluctuate around its average, reflecting overall volatility.
#2 HDFC Defence Fund
HDFC Defense Fund is a new scheme, launched on 2 June 2023. It is an open-ended thematic equity scheme with AUM of Rs 73.91 bn.
The scheme seeks to generate long-term capital appreciation by investing predominantly in equity and equity-related securities of Defense & allied sector companies.
The scheme expense ratio (direct plan) is 0.8%, and the exit load is 1% if redeemed within a month.
The fund currently has about 98.98% of its portfolio invested in equities, with the remaining 1.05% held in cash and cash equivalents.
Giant stocks accounted for 35.79% of the portfolio, followed by large (14.12%), mid (28.45%), and small (21.65%).
Its current portfolio allocation is 62.32% in industrials, consumer discretionary (17.58%), materials (13.46%), and technology (5.59%).
The scheme holds a concentrated portfolio of 24 stocks, with the top 10 holdings accounting for 84.07% of the AUM. Its top five holdings include Bharat Electronics (18.29%), Hindustan Aeronautics (13.66%), Bharat Forge (13.25%), Solar Industries (10.20%), and BEML (7.18%).
The scheme follows a buy-and-hold strategy, as indicated by a portfolio turnover ratio of 14.67%.
The scheme has delivered a return of 13.09% over the last year, outperforming the Nifty India Defence TRI return of 5.26%.
Its standard deviation stands at 29.49, with a Sortino ratio of 0.73 and a Sharpe ratio of 0.32.
#3 Canara Robeco Manufacturing Fund
Canara Robeco Manufacturing Fund is a new scheme, launched in March 2024.
The scheme aims to generate long-term capital appreciation by predominantly investing in equities and equity-related instruments of companies in the manufacturing theme.
It has an AUM of Rs 16.42 bn, with an expense ratio (direct plan) of 0.79%.
The fund currently has about 98.38% of its portfolio invested in equities, with 1.62% in cash and cash equivalents.
Giant stocks accounted for 37.98% of the portfolio, followed by large (24.35%), mid (25.67%), and small (12.00%).
Its current portfolio allocation is 32.75% in industrials, consumer discretionary (26.0%), materials (16.8%), energy and utilities (7.42%), and healthcare (6.49).
The scheme holds a balanced portfolio of 58 stocks, with the top 10 holdings accounting for 38.22%.
That this is also not a pure play defence scheme, rather this scheme has a sizeable allocation to aerospace and defence themes. Aerospace and defence sectors accounted for 8.11% of the portfolio, with 4.92% allocation to Bharat Electronics and Hindustan Aeronautics (3.19%).
Other stocks in the top 5 allocations include M&M (6.68%), Reliance (4.69%), and Maruti Suzuki (4%).
The scheme aims for moderate churn, as evidenced by a portfolio turnover ratio of 0.32.
The fund has delivered a 2.74% return over the last year, underperforming the Nifty India Manufacturing TRI’s 24.84% return.
Its standard deviation is 18.46, with a Sortino ratio of 0.30 and a Sharpe ratio of 0.16.
Conclusion
India’s defence theme has clearly transitioned into an investable, long-term opportunity, supported by sustained budgetary support, rising domestic procurement, and improving order visibility.
Defence-focused mutual funds offer investors diversified exposure to this structural shift without relying on individual stock selection.
However, being thematic in nature, these funds carry higher concentration and valuation risks.
Investors should align allocations with risk appetite, investment horizon, and overall portfolio diversification, rather than solely chasing recent performance.
Happy investing.
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