India’s defence sector is set for robust growth, driven by increasing government expenditure, “Make in India” plans, and a transition towards domestic production. Following are the best 7 schemes—combining active sectoral funds, passive index funds, and ETFs—that provide you with focused exposure to defence-oriented stocks.
| Rank | Fund / ETF Name | Type | 3-Year Annualised Return | AUM (₹ Cr) | Expense Ratio |
|---|---|---|---|---|---|
| 1 | HDFC Defence Fund Direct – Growth | Sectoral Equity Fund (Active) | 13.46% | 4,975.5 | 0.91% |
| 2 | HDFC Defence Fund Regular – Growth | Sectoral Equity Fund (Active) | 13.46% | – | 0.91% |
| 3 | Motilal Oswal Nifty India Defence Index Fund Direct – Growth | Index Fund (Passive) | N/A (Launched Jul ’24) | 2,875.5 | 0.29% |
| 4 | Motilal Oswal Nifty India Defence Index Fund Regular – Growth | Index Fund (Passive) | N/A (Launched Jul ’24) | 2,503.7 | 1.06% |
| 5 | Aditya Birla Sun Life Nifty India Defence Index Fund Direct – Growth | Index Fund (Passive) | N/A (Launched Aug ’24) | 391.1 | 0.31% |
| 6 | Groww Nifty India Defence ETF FoF Direct – Growth | Fund-of-Funds (Passive) | N/A (Launched Apr ’08) | 34.1 | 0.21% |
| 7 | Motilal Oswal Nifty India Defence ETF (MODEFENCE) | Thematic ETF | 19.56% | 202.7 | 0.41% |
Why Defence Thematic Investing?
- Policy Tailwinds – India’s defense spending and “Make in India” initiative are channeling $20 bn+ into local manufacturing, filling order books of entities such as HAL and Bharat Dynamics.
- High Growth Potential – Geopolitical tensions and modernisation drive robust returns: The HDFC Defence Fund has returned ~73% annualised since mid-2023.
- Focused Exposure – Sectoral funds and ETFs allow you to play the defence theme without stock-picking, saving research overhead.
- Passive Options – Low-cost index funds/ETFs (Expense ratios ~0.3–0.4%) follow the Nifty India Defence Index for rules-based, transparent investing.
Pros & Cons
| Pros | Cons |
|---|---|
| Targeted exposure to a high-growth theme | Very high volatility and sector concentration risk |
| Backed by government spending & policy support | Limited historical track record for new passive schemes |
| Mix of active (HDFC) and passive (MOF & ABSL) | Potential margin and liquidity risks in ETFs |
| Low-cost passive options available | Regulatory or geopolitical shifts can cause abrupt moves |
How to Invest
- Choose Your Vehicle:
- Active Fund: HDFC Defence Fund (Direct) for research-driven stock selection.
- Passive Index Fund/ETF: Motilal Oswal Index Fund or MODEFENCE ETF for low-cost, rules-based exposure.
- Check Your Risk Appetite: These schemes are Very High Risk—best for investors with a 3–5 year horizon and tolerance for drawdowns.
- Start with SIPs: Begin with a small monthly SIP (₹500–₹1,000) to average your cost and manage volatility.
- Monitor & Rebalance: Track the Nifty India Defence TRI benchmark and your portfolio performance; rebalance if allocation drifts by ±5%.
Final Thoughts
Defense industry mutual funds and ETFs present an attractive vehicle for taking advantage of India’s strategic move toward indigenous military manufacturing. Though thematic character implies greater volatility, steady, long-term investing—particularly through low-cost passive means—can assist you in taking advantage of the sector’s potential. Always keep your allocation aligned with your risk tolerance, diversify across other themes, and monitor policy evolution.
Frequently Asked Questions (FAQ)
Q1. Why invest in defence thematic funds?
A: They provide focused exposure to companies benefiting from rising defence budgets and “Make in India” initiatives, offering high growth potential.
Q2. Are defence sector funds risky?
A: Yes—these funds are rated Very High Risk due to sector concentration and sensitivity to geopolitical changes.
Q3. How do index funds and ETFs differ?
A: Both track the same Nifty India Defence Index, but ETFs trade like stocks on an exchange, while index funds are bought/sold through the fund house.
Q4. What’s the ideal investment horizon?
A: A minimum of 3–5 years to ride out the sector’s volatility and benefit from long-term growth trends.
Q5. Can I switch between active and passive defence funds?
A: Yes—rebalancing between active (HDFC) and passive (Motilal Oswal, Aditya Birla, Groww) can help optimize cost and performance.
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