Defence boom powers mutual funds to 30%+ returns, are investors ready for the risks?

Defence mutual funds in India have emerged as standout performers, delivering over 30% returns within the past six months. This has attracted significant interest from both retail and institutional investors. The impressive returns have propelled these funds ahead of broader equity benchmarks, driven by robust policy support and enthusiasm for India’s national security and self-reliance agenda.

The Nifty India Defence Total Return Index (TRI) has climbed 27.4% over the past three months, considerably outperforming the Nifty 50 TRI’s 8.2% gain. Several mutual fund schemes, including those from Motilal Oswal, Aditya Birla Sun Life, and Groww, have leveraged this trend, delivering exceptional short-term returns. However, experts caution that while these returns are attractive, defence mutual funds are categorised as “very high risk” due to their concentrated exposure to a single sector.

Financial advisors emphasize the importance of understanding the volatility associated with these funds. “Investors must remember that while the potential for high returns is significant, such thematic funds can also experience sharp volatility, especially during market corrections or policy shifts,” say financial advisors. “It’s crucial to allocate only a portion of your portfolio to such themes and stay prepared for fluctuations.”

Several top-performing funds have emerged in this space. The Motilal Oswal Nifty India Defence ETF has delivered 32.43% returns since its launch in August 2024, with key holdings in Bharat Electronics, Hindustan Aeronautics, and Solar Industries, which together constitute nearly 70% of the fund’s assets.

The Groww Nifty India Defence ETF, launched in October 2024, has returned 32.07%. Meanwhile, the Motilal Oswal Nifty India Defence Index Fund and the Aditya Birla Sun Life Nifty India Defence Index Fund have also posted impressive returns, all benefiting from the investor interest in defence stocks.

The global defence spending landscape is undergoing a significant shift. “At the NATO summit held in June 2025, 30 countries pledged to ramp up defence expenditure significantly over the next decade,” notes Motilal Oswal Financial Services Ltd. “Their target is to spend 5% of GDP on defence by 2035, up from around 1.5% in 2021. This includes allocations not only for traditional military hardware and personnel but also for cutting-edge areas like cybersecurity, AI, space, and tech infrastructure.”

This increased spending presents opportunities for Indian companies. “This surge in spending could be great news for Indian defence companies,” states Motilal Oswal Financial Services Ltd. “European nations will require radar systems, ammunition, electronic components, and other specialized products that Indian firms are well positioned to supply.”

India’s defence exports have already shown significant growth, reaching Rs 21,000 crore in FY24, a 32% increase over the previous year. Companies like Hindustan Aeronautics Limited (HAL) and Bharat Electronics stand to benefit from this rising demand, potentially enhancing the appeal of defence mutual funds as a thematic investment.

As India continues to focus on indigenisation and strengthen its defence sector, analysts believe that defence mutual funds could remain an enticing yet volatile option for investors seeking to capitalise on national security-led economic growth. These developments highlight the potential and risks associated with investing in this niche market.

Moreover, the growing interest in defence mutual funds is a reflection of the broader economic trends and geopolitical shifts. As nations worldwide bolster their defence budgets, Indian companies are strategically positioned to meet this demand, offering a unique opportunity for investors who are willing to navigate the inherent risks. The defence sector’s trajectory suggests a promising yet challenging path, requiring investors to be both informed and cautious in their approach. Additionally, the focus on self-reliance and innovation in defence technology further underscores the sector’s potential for long-term growth.

In conclusion, while the defence mutual funds offer a compelling investment avenue, they are best suited for those who can withstand their inherent volatility. With the global defence landscape evolving rapidly, these funds could serve as a strategic component of a diversified investment portfolio for those looking to tap into both domestic and international defence markets.