Investing in India’s Defence Growth Story: Why, How, and What to Keep in Mind

The Indian defence sector has emerged as one of the most powerful thematic opportunities for long-term investors. Backed by record-high defence spending, strategic policy tailwinds, a strong pipeline of orders, and India’s transformation from a defence importer to a rising global exporter, the sector is entering a multi-year growth phase. As retail interest grows and mutual funds aligned to the defence theme show stellar returns, investors are asking the right question: Should I invest now, and if yes, how?

Why Defence as an Investment Theme Now?

India’s defence sector is undergoing a structural transformation. Geopolitical tensions—heightened by recent clashes with Pakistan and the persistent China border challenge—have brought national security into sharper focus. This urgency has been matched by robust government action: a ₹ 6.2 lakh crore defence budget for FY25, and over ₹ 8.45 trillion in orders cleared since FY22. Importantly, India’s defence capital expenditure is set to grow at a CAGR of ~15% till FY30, reflecting a decisive shift from personnel-heavy budgets to asset-heavy modernization.

The “Make in India” initiative is another crucial pillar. Over 4,600 defence items have been placed under import embargo, FDI limits have been relaxed to 74%, and private players have entered the fray in full force. Companies like Hindustan Aeronautics (HAL), Bharat Electronics (BEL), Solar Industries, and Data Patterns are seeing expanding order books, stronger execution visibility, and improved global competitiveness.

India is also evolving into a credible global supplier. Defence exports have grown 8x since FY15 and are targeted to touch ₹ 50,000 crore by FY29, with more than 85 countries now procuring Indian arms and equipment. This creates a powerful runway for earnings visibility and makes the sector a compelling long-term compounder.

How Have Defence Funds Performed?

The recent market performance reflects growing investor confidence in this theme. The Nifty India Defence Total Return Index (TRI) has surged nearly 60% over the past three months (as of May 2025), vastly outperforming broader indices like the Nifty 50. This rally has translated into stellar returns for defence-focused funds.

Passive products like the Motilal Oswal Nifty India Defence Index Fund, Aditya Birla SL Nifty India Defence Index Fund, and the Groww Nifty India Defence ETF have returned over 28% in just one month and more than 60% over three months. The actively managed HDFC Defence Fund has also delivered strong gains, with a 1-year return of 11.4%, despite launching in a volatile market environment.

A key driver behind this outperformance is order visibility. Public and private defence companies are now operating with large backlogs and strong execution momentum. HAL, BEL, Mazagon Dock, and Cochin Shipyard—all major index constituents—have demonstrated strong earnings, high RoEs, and growing global recognition.

How Should Investors Approach This Theme?

While the growth story is clear, the investment approach requires caution, discipline, and alignment with risk appetite. Defence funds are sector-specific and inherently concentrated. They tend to be more volatile than diversified equity funds and are sensitive to policy shifts, geopolitical developments, and execution challenges.

Here are five key principles investors should consider:

1. Adopt a Long-Term Horizon:

Defence is a capex-heavy and policy-driven sector, best suited for long-term investors. A 5–10 year investment horizon aligns well with the multi-year modernization and export growth cycle underway.

1. Prefer SIPs or Staggered Entry:

Given the sharp run-up in prices and current elevated valuations (Nifty India Defence Index trades at a P/E of ~60x), a systematic investment plan (SIP) helps average out costs and manage timing risk. Tactical investors can consider staggered lump-sum investments during market dips.

1. Limit Allocation as Part of Satellite Portfolio:

Defence funds should ideally form 5–10% of an investor’s overall equity portfolio. Being thematic, they complement a core diversified strategy and serve as return enhancers rather than portfolio anchors.

1. Choose Funds Based on Style Preference:
   • Active: Investors seeking alpha and comfortable with fund manager discretion may opt for HDFC Defence Fund.
   • Passive: Those preferring lower costs and index-tracking consistency can go for ETFs or index funds by Motilal Oswal, Aditya Birla, or Groww.
2. Understand the Risks:

These funds carry higher concentration risk, are exposed to execution delays, and depend heavily on government policy. It’s important to diversify across other sectors and avoid over-exposure to a single theme, no matter how promising.

Final Thoughts: Build a Balanced Bet on Bharat’s Strategic Ascent

India’s defence sector is no longer a sleeping giant. From policy push to global export ambitions, the foundations for long-term value creation are in place. For investors willing to embrace a high-growth, high-risk theme within a disciplined framework, defence funds offer a unique opportunity to ride the next wave of India’s economic and strategic ascent.

However, timing the entry right, sizing allocations prudently, and maintaining portfolio balance are key to converting this opportunity into wealth over time. With the right approach, defence can become more than just a tactical bet—it can be a structural engine in your investment journey.

Market this week

Source: BSE and NSE

• Benchmark indices ended mixed. FPIs sold ~$560 million amid global caution and profit booking. Global cues were volatile ahead of US inflation data and Fed rate expectations. The RBI’s record ₹2.69 trillion dividend boosted fiscal sentiment.
• Gold ended higher after a choppy week driven by inflation worries and dollar moves.
• The rupee stayed stable, supported by RBI forex interventions.
• Nifty 50 fell to 24,750 (-0.41%), while Nifty Midcap 150 (+1.20%) and Smallcap 250 (+1.82%) outperformed.

Weekly Leaderboard

Source: BSE

Stocks that made the news this week:

Suzlon Energy: Shares jumped 13.6% on Friday, driven by rising profits and strong investor interest. It also led the NSE in traded value at ₹627 crore.

State Bank of India (SBI): Rose 1.89% on Friday, outperforming peers like ICICI Bank and Kotak Mahindra Bank, despite a weak broader market.

Reliance Power: Hit a 52-week high with a 15% rally in a single session, and is up 111% over the past year.

Apollo Hospitals: Reported a 53% year-on-year rise in Q4 consolidated net profit to ₹390 crore and declared a ₹10 per share dividend.

Nykaa (FSN E-Commerce): Posted a 193% year-on-year jump in Q4 profit to ₹20 crore, with revenue growing 24%, boosting investor sentiment. average free-float market capitalization, though their stocks still posted gains of 1.7% and 0.7%, respectively.