India’s defence sector has gone through a busy phase this year. More production at home, a growing export pipeline and steady government spending have pushed investor attention toward this theme. With that interest comes a question that investors often struggle with. When a theme rises, is it better to trust a manager who builds a compact portfolio or simply follow an index that captures the entire move?
Two funds sit at the centre of this discussion. HDFC Defence Fund represents the active route, and the Motilal Oswal Nifty India Defence Index Fund follows the Nifty India Defence TRI without taking any stock-specific calls. Both operate in the same space, and both hold many of the same companies, but the way they take risk is very different. That difference becomes obvious when you look at their performance over the last year. Within the index-fund options tracking the same theme, Motilal Oswal’s scheme stood out in Financial Express Mutual Fund Screener (Financialexpress.com) simply because it posted the strongest one-year return in the entire Nifty India Defence category, making it the most relevant benchmark for comparison.
What defence funds do?
A defence fund invests mainly in companies involved in aerospace, shipbuilding, electronics, missiles, explosives and associated manufacturing. These stocks often move in bursts because order flows, policy announcements or external events can shift sentiment quickly. This is why structure matters. An index fund holds the entire theme as it is. An active fund builds its own mix inside the same space. Depending on how the sector behaves during a particular period, either approach can come out ahead.
How to judge funds in this category?
The best way to understand these funds is to look at how concentrated the portfolio is, what part of the market-cap spectrum it depends on, the level of stock selection involved and how closely the fund moves with the broader theme. Costs and portfolio turnover matter as well. One-year returns tell you how the scheme handled the latest cycle, but longer periods show whether the strategy works across different conditions.
#1: HDFC Defence Fund
HDFC Defence Fund takes a compact approach with a strong tilt toward established companies in the defence supply chain. Its one-year CAGR stands at 22.88%, with a NAV of Rs 725.5200 as of 20 November 2025, and the fund manages Rs 77,557 crore. The scheme is managed by Rahul Baijal and Priya Ranjan, and it keeps churn low, reflected in a portfolio turnover of 12.73%. The Sharpe ratio of 0.50 captures how the fund balanced return and risk during the year.
The portfolio stays almost fully invested, with 98.87% in equities and a small position in cash. The largest weight goes to Bharat Electronics at 18.51%, followed by Hindustan Aeronautics at 13.94%, Bharat Forge at 11.40%, Solar Industries at 11.30% and Bharat Dynamics at 5.16%. Other names in the portfolio include Cochin Shipyard, Cyient DLM, Premier Explosives, MTAR Technologies, Data Patterns, Mazagon Dock, Avalon Tech, Rishabh Instruments and several smaller positions that support the defence manufacturing ecosystem.
The fund builds its bets around companies that the managers believe can hold leadership as the domestic defence industry expands. This narrow approach helps the scheme stay focused, but it can also mean that it moves differently from the broad theme during periods where most stocks rise together.
#2: Motilal Oswal Nifty India Defence Index Fund
The Motilal Oswal Nifty India Defence Index Fund mirrors the Nifty India Defence TRI. Its one-year CAGR stands at 37.4%, based on a NAV of Rs 710.87 on 20 November 2025, and it manages Rs 73,892.07 crore. The fund charges an expense ratio of 0.48% and follows a mechanical rebalance cycle, which keeps its portfolio turnover at 30%. The scheme is managed by Swapnil P Mayekar, Rakesh Shetty and Dishant Mehta.
The portfolio carries the same weights as the index. Bharat Electronics leads with 21.05%, followed by Hindustan Aeronautics at 19.52%, Bharat Forge at 12.15%, Solar Industries at 11.63% and Mazagon Dock at 7.13%. The theme is dominated by a small cluster of companies, and the fund holds them exactly as the index does. This structure ensures that the scheme captures the full movement of the sector, whether the market is rising or consolidating.
In a year where most defence stocks gained steadily, this approach helped the fund stay in line with the index. There were no selective calls and no attempts to reduce exposure, which allowed the scheme to capture the entire rally.
#3: Nifty India Defence TRI
The benchmark for the theme posted a one-year CAGR of 37.24%, the strongest among the three. When leadership stocks inside a theme rise at the same time, a pure index tends to set the pace. That pattern held true this year as well. The TRI moved with the broader sector without any change in its structure. Over three years, the index has moved at a CAGR of 55.03%, and over five years, 64.10%, both extraordinary numbers for any sector index. But defence, as a theme, moves in steep, concentrated cycles, and the index embodies that volatility.
It is a pure thematic indicator, not balanced, not cushioned, not diversified across the market. When the sector is in favour, the index runs hot. When sentiment turns, it can correct just as sharply.
Who won the one-year race
The index fund came out ahead. The Nifty India Defence TRI delivered the highest return, and the Motilal Oswal index fund stayed close to it, as expected from a fund built to track the index. HDFC Defence Fund delivered a positive result but not at the same speed because it carried a narrower set of stocks. In a year defined by broad strength across the theme, the index approach had the advantage.
The investor’s takeaway
Defence funds belong in the satellite part of a portfolio. They can deliver strong phases, but they also move through sharp swings, and investors need to be prepared for that. These schemes should be held for long periods, not judged by short stretches. Before investing, make sure you are comfortable with the volatility that comes with a specialised theme. Most importantly, any allocation to a defence fund should fit within your overall asset mix, not replace a diversified equity holding. If you prefer exposure to the entire theme without making stock-level decisions, the index fund offers that. If you want a selective list built through active judgment, HDFC Defence provides that route. Either way, the fund works best when treated as part of a long-term plan rather than a short-term decision.
Disclaimer: The above content is for informational purposes only. Mutual Fund investments are subject to market risks. Please consult your financial advisor before investing.