In recent years, India’s defence sector has undergone notable structural changes. The government has focused on strengthening domestic manufacturing capabilities, reducing import dependence, and encouraging participation from private companies alongside public sector enterprises.
With increasing attention on defence manufacturing and related industries, some investors have begun exploring investment avenues linked to this sector. Some defence-focused mutual funds and exchange-traded funds (ETFs) have emerged to provide exposure to companies operating in defence manufacturing, aerospace, shipbuilding, electronics, and allied segments.
This article explains what defence-focused mutual funds and ETFs are, how they function, why the theme is being discussed more frequently, and what investors may consider before investing.
Table of Contents:
- What is a defence ETF or mutual fund?
- Defence mutual fund vs Defence ETF
- Why Defence Funds are gaining popularity
- Defence mutual fund in a portfolio
- Key benefits of investing in defence mutual funds
- Risks to consider before investing
What is a defence ETF or mutual fund?
A defence mutual fund is generally thematic equity mutual fund, index fund or ETF that invests predominantly in companies associated with the defence and aerospace ecosystem. These may include businesses involved in military equipment manufacturing, electronics systems, engineering services, shipbuilding, aerospace components, and related technologies.
Defence ETFs and defence mutual funds provide sector-specific exposure through a pooled investment structure. Since these schemes typically invest primarily portfolio in equities, they are generally classified as very high risk investment products. Moreover, they may be more concentrated than funds tracking the broader market.
Such funds aim to capture potential opportunities arising from developments within the defence sector. However, returns remain market-linked and depend on company performance, sector conditions, and broader equity market movements.
Also Read: Thematic vs. Sector Funds: Key Differences
Defence mutual fund vs Defence ETF
Defence mutual funds and Defence ETFs both provide exposure to the defence theme, but they differ in structure and mode of investing.
Defence Mutual Fund (Active or Passive)
Defence mutual funds are offered by asset management companies and may follow either an active or passive strategy. An actively managed defence fund relies on fund manager research and portfolio decisions within the thematic universe. A passive defence fund seeks to replicate the performance of a defence-related benchmark index, subject to tracking error.
Defence ETF
A defence ETF generally tracks a defence-related index, such as the Nifty India Defence Index. ETF units are listed on stock exchanges and can be bought or sold during market hours through a demat and trading account.
Both structures remain subject to market risk, and neither provides any assurance of returns.
Why Defence Funds are gaining popularity
Policy focus on domestic manufacturing
India’s defence policy has increasingly emphasised domestic production through initiatives such as Make in India and indigenisation programmes. These initiatives aim to strengthen local manufacturing capabilities over time. Policy direction may create potential opportunities for listed companies engaged in defence manufacturing and services.
Increasing role of private companies
Historically, defence production in India was dominated by public sector undertakings. Over time, private companies have entered segments such as electronics, components, subsystems, and design services. This is validated by the Make in India Defence initiative, of which the second phase – Make II – was industry funded with a goal of import substitution.
Long-term strategic nature of defence spending
Defence expenditure is typically planned over multi-year horizons. While this may provide some visibility into sector demand, company revenues may remain uneven due to project timelines, procurement procedures, and policy changes.
Growing awareness of thematic investing
Investors have become more aware of thematic mutual funds as a distinct category within equity investing. Defence-themed products are often discussed alongside other sectoral funds such as infrastructure, manufacturing, or energy funds.
*Sources: Make in India Defence website, “Defence Atmanirbharta: Record Production and Exports”, Press Information Bureau, November 20, 2025.
Defence mutual fund in a portfolio
A defence mutual fund portfolio generally includes companies involved in designing, developing, manufacturing, or supplying defence-related products and services.
These portfolios may contain a mix of public sector enterprises and private sector companies operating across aerospace, naval systems, electronics, engineering, and technology segments. Because thematic funds concentrate investments within a specific sector, diversification remains limited compared with diversified equity mutual funds.
Although defence spending is linked to government budgets, equity investments in this sector remain market-linked and may experience periods of volatility. Defence mutual funds therefore generally carry very high risk due to sector concentration.
Also Read: Opportunity Funds: Meaning, Benefits & How to Invest?
Key benefits of investing in defence mutual funds
Government policy support
Government initiatives promoting domestic defence manufacturing and indigenisation may create potential opportunities for companies operating within the sector over the long term.
Structural industry development
India’s defence production has expanded in recent years alongside policy initiatives encouraging local manufacturing and private participation. Industry development may support business expansion for certain companies, subject to execution and competitive factors.
Sectoral exposure
Defence mutual funds provide exposure across segments such as aerospace, shipbuilding, electronics, engineering, and defence equipment manufacturing.
Technology and innovation exposure
Some defence companies operate in areas such as advanced electronics, cybersecurity, drones, and artificial intelligence applications. These areas may offer long-term growth potential, although technological and execution risks remain.
Export opportunities
India’s defence exports have shown growth over recent years. Expansion into international markets may create additional revenue opportunities, subject to global demand conditions and geopolitical developments.
Order book visibility
Large defence contracts may provide revenue visibility for certain companies. However, earnings may fluctuate due to project execution timelines, contract revisions, or procurement delays.
Risks to consider before investing
Sector-specific risks
Defence mutual funds are exposed to risks specific to the defence industry. Changes in government policy, defence budgets, procurement decisions, or geopolitical developments may influence company performance and fund returns.
High volatility and concentration risk
Because these schemes invest predominantly in a single sector, price movements may be more volatile compared with diversified equity mutual funds. Defence funds typically require a very high risk appetite.
Also Read: Business Cycle Mutual Funds: Meaning and Benefits
Conclusion
Defence-themed mutual funds and ETFs offer focused exposure to a sector linked to India’s strategic and industrial development. These schemes provide thematic participation through equity markets but remain subject to sector concentration risk, policy dependency, and market volatility. Defence mutual funds may be considered as a limited allocation within a diversified portfolio by investors who understand thematic investing and are comfortable with fluctuations. Investment outcomes remain market-linked and are not guaranteed.
FAQs
Is it better to invest in a defence ETF or an active defence mutual fund?
Both structures function differently. A defence ETF passively tracks a benchmark index and generally follows a rule-based approach, while an active defence mutual fund relies on fund manager decisions within the thematic universe. Suitability depends on investment preference, costs, and trading convenience.
What is the outlook for Indian defence exports?
India has introduced policy initiatives to encourage defence exports and international partnerships. While this may create potential opportunities, actual export growth depends on competitiveness, execution capability, geopolitical conditions, and global demand trends.
Are defence mutual funds recession-resistant?
Defence spending may be planned over longer horizons compared with some sectors; however, defence mutual funds remain equity investments. Market cycles, valuation changes, and company-specific developments may still result in volatility.
Why is a defence fund’s performance so volatile?
Performance volatility may arise from sector concentration, contract-related announcements, policy developments, valuation changes, and the presence of mid cap and small cap companies within defence sector portfolios.
