Defence funds are exploding with 60% gains — too late to invest or just the beginning?

With strong government backing and escalating geopolitical tensions, India’s defence sector has emerged as a standout performer in the stock market. Defence-focused mutual funds have rallied sharply in recent months, delivering returns of up to 60% in just three months.

The category, comprising six active and passive funds, recorded an average return of 57.70% during this period. Leading the performance charts is the Motilal Oswal Nifty India Defence ETF, which posted a 60.49% return, followed closely by the Motilal Oswal Nifty India Defence Index Fund, which delivered a 60.23% gain.

In the last one month alone, the defence sector surged 30%, driven by higher government capital expenditure, policy reforms, and global developments that have boosted investor sentiment around domestic defence manufacturing. This sharp rally has sparked renewed interest in defence mutual funds as a promising thematic investment.

“In recent months, the defence sector has gained significant traction, delivering 30% returns in the last one month and 60% in the past three months. This rally has been fuelled by increased government spending, policy support, and geopolitical developments. However, investing based purely on current momentum is not advisable. Historically, the defence sector has displayed cyclical performance. For instance, while it was a top-performing sector from 2023 to mid-2024, it registered negative returns of 15% to 20% between mid-2024 and January 2025,” noted Arjun Guha Thakurta, Executive Director, Anand Rathi Wealth Limited.

Why defence stocks and funds are surging

Following the recent spike in tensions between India and Pakistan — particularly after Operation Sindoor — the Nifty India Defence Index TRI surged 22% as of May 23, 2025. In comparison, the Nifty 500 TRI managed a modest 3% gain during the same timeframe.

Make in India push: The government’s focus on building a self-reliant defence manufacturing ecosystem under the Make in India initiative has led to sweeping reforms. These efforts aim to promote indigenous design, development, and production, reducing dependence on imports.

Explosive export growth: India’s defence exports reached a record Rs 23,622 crore in FY24–25, compared to just Rs 686 crore in FY13–14. This represents a 38% compound annual growth rate, showcasing strong global demand for Indian defence systems.

Swelling order books: The combined effect of localisation and rising exports has significantly bolstered the order pipelines of defence companies. Hindustan Aeronautics Ltd (HAL), which holds nearly 20% allocation in some defence mutual funds, has seen its order book grow at a 32% CAGR over the past three years.

Geopolitical headwinds: Renewed conflict risks, especially with neighbouring Pakistan, have accelerated defence preparedness and investment. This has reinforced investor confidence in the sector’s growth potential amid expectations of continued government procurement and budgetary support.

Caution ahead: Experts favour diversification

While the long-term outlook for the defence sector remains positive, experts advise against going all-in on sector-specific bets. The cyclical nature of defence stocks means timing plays a critical role — a strategy not suited for most retail investors.

Diversified equity funds offer exposure to high-performing themes like defence, while cushioning against the volatility of individual sectors. They also help investors navigate different market phases without relying on short-term momentum.

“We remain optimistic about the long-term prospects of India’s defence sector, bolstered by favourable policies and capital commitments. However, concentrating investments in a single sector increases risk. Instead, we recommend investors opt for broad-based diversified equity funds — whether market cap-based or strategy-driven — which provide balanced exposure across sectors and market segments. This diversification is key to managing concentration risk and navigating various market cycles,” added Guha Thakurta.