Best Defence Sector Mutual Funds in India 2025

Introduction

India’s defence sector is growing fast. The government is spending more on buying weapons, building ships and aircraft, and making modern equipment. At the same time, private companies are entering defence production under “Make in India.” All this means defence stocks can give good returns to investors over time.

A defence sector mutual fund is a type of fund that puts most of its money into companies making weapons, ammunition, aerospace parts, defence electronics, shipyards, and related industries. This lets you invest in the defence growth story without picking individual stocks.

In this article, we will cover:

What are sector and thematic mutual funds?
Why consider a defence sector fund?
How defence funds work
Pros and cons of investing in defence sector funds
Examples of defence-focused funds and ETFs in India
How to pick the right fund
How to invest and monitor your holdings
Frequently asked questions (FAQs)
Conclusion

We explain each point in simple English to help you decide if a defence sector fund fits your goals.

1. What Are Sector and Thematic Mutual Funds?

Most mutual funds in India spread their investments across many industries—like banking, IT, consumer goods—to reduce risk. But a sector mutual fund focuses on one specific industry. For example:

A banking sector fund invests mostly in banks and financial companies.
A pharma sector fund invests in drugmakers.
A defence sector fund invests only in defence and aerospace companies.

A thematic fund invests in a broader theme that may span several sectors—like “digital India,” “rural growth,” or “electric vehicles.” A defence fund is sometimes called a thematic fund if it mixes defence stocks with related parts suppliers or technology companies.

By focusing on one area, sector funds aim to benefit more when that industry does well. But they also carry more risk if that industry faces trouble.

2. Why Consider a Defence Sector Fund?

2.1 Rising Defence Budget

India’s defence budget has grown steadily over the last decade. In 2025, it crossed ₹5 lakh crore.
This money goes to modern equipment, next-generation fighter jets, warships, radar systems, and more.

2.2 “Make in India” Push

The government wants to build defence equipment locally rather than import.
It gives licences and tax breaks to private companies to make parts and systems in India.
This helps both big public sector undertakings (like HAL, BHEL, BEL) and private firms (like Tata, L&T, Bharat Forge).

2.3 Export Opportunities

India is selling its defence products to friendly countries in Asia, Africa, and Latin America.
Exports bring extra revenue and future orders, boosting profits of exporters.

2.4 Technology and Innovation

Defence requires advanced electronics, drones, secure communication, and software.
Companies working in these areas can grow quickly with global demand.

2.5 Long-Term Growth Story

Defence spending usually continues even in uncertain times, because security is crucial.
Over a 5–10 year horizon, strong government support and export growth can drive good returns.

3. How Defence Sector Funds Work

A defence sector mutual fund pools money from many investors and invests mainly in shares of defence-related companies. Here is how it typically works:

Collecting Investor Money
- You and other investors put in money—either one-time or via SIP (Systematic Investment Plan).
Fund Manager Research
- The fund manager studies defence companies, their order books, profit outlook, valuations, and global trends.
Building the Portfolio
- The manager buys shares of companies like Bharat Electronics, Hindustan Aeronautics (HAL), Bharat Forge, L&T Defence, Tata Advanced Systems, and so on.
- Some funds may also hold PSU defence stocks (like BEML, GRSE) and private firms supplying parts or technology.
Ongoing Monitoring
- The manager watches government budgets, export orders, company performance, and overall market factors.
- They may buy more of strong stocks or exit those that look overvalued or weak.
Distributing Gains
- If these stocks rise in value, your fund’s Net Asset Value (NAV) increases.
- You can sell your fund units at the higher NAV to book profits.

Unlike a broad-market fund, a defence sector fund puts at least 65–80% of its assets in defence stocks. The rest may go into cash or related sectors to manage liquidity.

4. Pros and Cons of Investing in Defence Sector Funds

Pros

Focused Exposure: You get direct exposure to the defence theme without picking individual shares.
Professional Management: Experts pick and manage the defence stocks for you.
High Growth Potential: Defence budgets and exports can drive fast growth for select companies.
Long-Term Stability: Defence is a “must” industry, so spending continues even in downturns.
Convenience: Buying a fund is easier than researching and trading multiple defence stocks.

Cons

High Sector Risk: If defence spending falls or orders get delayed, funds can decline sharply.
Volatility: Defence stocks can have big ups and downs based on tender wins, policy changes, or global events.
Lack of Diversification: Compared to a multi-sector fund, a defence fund is less diversified and more vulnerable to sector setbacks.
Liquidity Issues: Some defence stocks trade thinly, making them harder to buy or sell quickly.
Higher Expense Ratio: Sector funds often charge more (1.5–2.5%) than large-cap or index funds (0.2–1%).

Because of these risks, defence sector funds suit investors who:

Believe strongly in the defence growth story
Can tolerate high volatility
Have a long time horizon (at least 5–7 years)

5. Examples of Defence-Focused Funds and ETFs in India

As of 2025, India has few pure defence mutual funds. However, you can gain sector exposure through:

PSU Sector Funds
Thematic or Sector ETFs
Broad Defence & Aerospace Funds (limited)

Below are some popular options:

5.1 PSU Sector Equity Funds

These funds invest in Public Sector Undertakings (PSUs) across industries including defence. Top PSU funds include:

Fund Name	Defence Stocks Held*	3-Yr CAGR	5-Yr CAGR	Expense Ratio
SBI PSU Fund (Direct)	BEL, BEML, HAL	12.5%	14.2%	1.75%
ICICI Prudential PSU Fund (Direct)	BEL, BEML, GRSE, HAL	11.8%	13.5%	1.60%
Nippon India ETF Nifty CPSE (ETF)	BEL, BEML, HAL, GRSE, BHEL	8.3%	9.5%	0.40%

*Not exhaustive. Holdings can change over time.

Notes:

PSU funds give exposure to government-owned firms in defence and other areas like power, oil & gas.
The CPSE ETF tracks the Nifty CPSE Index, which includes top central public sector enterprises.

5.2 Thematic or Sector ETFs

ETF Name	Tracks	Key Defence Names	Expense Ratio
Nippon India Nifty CPSE ETF	Nifty CPSE Index	BEL, BEML, HAL, GRSE, BHEL	0.40%
Motilal Oswal MOSt Share Scheme – PSU ETF	S&P PSU Index	BEL, BEML, HAL, GRSE	0.35%
ICICI Prudential Defence Services Fund (Thematic)†	Composite Defence Index	HAL, BEL, Tata Adv. Sys.	1.80%

† Hypothetical example; actual offerings may vary.

5.3 Broad Defence & Aerospace Funds

Globally, there are pure defence & aerospace funds, but in India they are rare. One or two fund houses have launched small thematic schemes focused purely on aerospace & defence, but assets remain low and liquidity limited.

6. How to Pick the Right Defence Sector Fund

When choosing a defence-themed fund or ETF, consider these factors:

Fund Category: Decide if you want a PSU fund, a broad thematic fund, or an ETF. ETFs are cheaper but passively managed; mutual funds are active but costlier.
Expense Ratio: Lower fees help returns. PSU ETFs cost around 0.3–0.4%, PSU mutual funds charge 1.5–1.8%.
Fund Size (AUM): Too small can mean liquidity issues; too big can make it hard to buy more shares. Aim for ₹500–5,000 crore in assets.
Portfolio Holdings: Check top 5–10 stocks. Make sure defence names like BEL, HAL, BEML, Tata Advanced Systems, L&T Defence are well represented.
Performance Track Record: Compare 3-year and 5-year returns against a relevant benchmark (CPSE Index or Nifty 50).
Volatility and Risk Measures: Look at standard deviation (how bouncy the fund is) and beta (how closely it moves with the market). High beta means more swings.
Fund Manager Experience: See how long the manager has run the scheme and their defence sector expertise.
Liquidity: Check average daily trading volumes (for ETFs) or daily inflows/outflows (for mutual funds). You want to buy and sell easily.

7. How to Invest and Monitor Your Defence Fund

7.1 Investing Steps

Complete KYC: Indian mutual funds require KYC (Know Your Customer) with Aadhaar and PAN.
Choose Platform: You can invest via fund house websites, broker apps (Zerodha Coin, Groww, Paytm Money), or bank portals.
Select Direct Plan: If you invest yourself online, pick the “Direct” option to save on distributor fees.
Pay SIP or Lump Sum:
- SIP: Start with as low as ₹500 per month.
- Lump Sum: Invest a one-time amount if you have extra money.
Set Alerts: Note your SIP date and fund NAV.
Get Statement: Download your account statement every quarter to track holdings and value.

7.2 Monitoring Your Investment

Check NAV: See daily NAV changes on your platform or fund house site.
Review Quarterly Factsheet: Fund houses publish factsheets with portfolio details and performance.
Compare Benchmarks: For PSU funds/ETFs, compare against Nifty CPSE or S&P PSU Index.
Look at Flows: Big inflows can push prices up; big outflows can push NAV down.
Assess Government Announcements: Watch defence budget announcements, policy changes, and export orders—these affect sector performance.

7.3 When to Exit or Rebalance

Goals Change: If your objective changes (e.g., you need money), you may partially redeem after holding at least 3 years.
Fund Underperforms: If the fund falls well behind its benchmark for 2–3 years, consider switching.
Overweighting: If your defence fund grows to be more than 10–15% of your total portfolio, you might trim to maintain balance.

8. FAQs

Q1: Is 3 years lock-in for ELSS applicable to defence sector funds?
A: No. Only ELSS funds have 3-year lock-in. Sector funds and ETFs have no mandatory lock-in—you can redeem anytime (subject to exit load if any).

Q2: Can I start with a small amount?
A: Yes. Many funds/ETFs allow you to start with ₹500 SIP or buy one ETF unit (usually ~₹50–₹200).

Q3: Are defence sector funds safe?
A: They carry higher risk than diversified funds. Only invest money you can keep for at least 5–7 years and tolerate volatility.

Q4: Should I invest only in defence funds?
A: No. To reduce risk, keep defence funds as a part (10–20%) of your total equity allocation. The rest can go into large-cap, mid-cap, or diversified funds.

Q5: How do I track government defence spending?
A: Watch the Union Budget speech, Ministry of Defence announcements, and trade shows like DefExpo for new contracts and policy updates.

9. Conclusion

Defence sector mutual funds and ETFs offer a focused way to benefit from India’s large and growing defence budget, local manufacturing push, and export opportunities. Because they concentrate on one industry, they can deliver strong returns when the sector booms—but they also carry higher risk and volatility.

Before investing:

Understand your time horizon (at least 5–7 years).
Know your risk appetite (can you handle big swings?).
Keep these funds as a smaller part of your overall portfolio (10–20% max).
Choose carefully based on expense ratio, fund size, track record, and holdings.
Monitor budgets, orders, and sector news regularly.

By combining a defence sector fund with broader equity and debt funds, you can build a well-rounded portfolio that captures India’s defence growth story while managing risk. Happy investing!