This bullish trend in defence mutual funds has raised a question about whether defence funds are just a temporary trend or represent a long-term investment opportunity in India.
In this blog, we will explore the reasons behind the popularity of defence funds in India.
Defence mutual funds are specialized investment strategies that focus on companies within the defence sector. These funds primarily invest in businesses involved in defence manufacturing, aerospace, and related technologies.
Several factors drive investor interest in defence mutual funds. Some of these factors are discussed below:
The Indian government has strongly focused on indigenization and self-reliance in defence production through initiatives like "Make in India" and "Aatmanirbhar Bharat". This includes increased budget allocation, a focus on domestic procurement with 75% of the modernization budget earmarked for domestic sources, and relaxed FDI limits to 74% through the automatic route.
The opening up of defence to private players, along with the introduction of Innovations for Defence Excellence (iDEX), has created a fertile ground for defence-tech start-ups. This broadens the sector's investment base and may help Defence Funds diversify over time. The allocation for the iDEX scheme has also nearly tripled in two years to ₹449.62 crore to fund innovation projects in the defence sector.
The Indian government is committed to long-term military preparedness, with the defence budget nearly tripling from ₹2.53 lakh crore in 2013–14 to ₹6.81 lakh crore in 2025–26. The CII KPMG Report projects that India's defence expenditure will increase fivefold from 2024–2025 to ₹31.7 lakh crore by 2047.
Rising geopolitical tensions, including border challenges with China and ongoing issues with Pakistan, have brought national security into sharper focus, driving increased defence spending and modernization efforts.
The NATO summit in June 2025 saw 32 countries pledge to significantly increase defence expenditure, aiming to spend 5% of GDP on defence by 2035, up from 1.5% in 2021. This global surge creates opportunities for Indian defence companies to supply radar systems, ammunition, and electronic components.
The Nifty India Defence Total Return Index (TRI) has experienced significant growth, rising nearly 27.4% over the past three months, outperforming broader indices such as the Nifty 50. For example, the HDFC Defence Fund from HDFC mutual funds has generated a return of 57.71% since its inception on June 2, 2023.
India is transitioning from a major defence importer to a global supplier. Defence exports have reached an all-time high of ₹23,622 crore in FY2024-25, up 12.04% year-on-year. The target for defence exports is ₹50,000 crore by 2029.
Defence funds in India are evolving from a short-term trend to a compelling long-term theme, supported by robust policy support, rising exports, and strategic national priorities. The sector’s transformation is structural, not cyclical, and aligns with India’s ambitions for self-reliance, technological leadership, and global competitiveness.
For investors willing to accept higher volatility and adopt a long-term perspective, defence funds offer both growth potential and an opportunity to participate in India's growth story.