India’s defence spending continues to rise, with the 2025–26 budget allocating over ₹6.2 lakh crore to the sector. A strong focus on indigenous manufacturing under the Atmanirbhar Bharat initiative has led to increased order books for domestic defence companies. Exports are also growing, with Indian firms supplying equipment and systems to multiple countries.
This shift is changing how investors look at the sector. Defence mutual funds invest in companies involved in aerospace, shipbuilding, electronics, and military equipment manufacturing. As government spending increases and private participation expands, these funds are drawing attention from investors seeking focused exposure to this theme.
However, defence sector mutual funds are concentrated bets. They can deliver strong returns during sector upcycles but may also see sharp corrections. Choosing the right defence mutual fund requires careful evaluation of performance, holdings, and risk.
In this guide, we’ll cover the best defence mutual fund options for 2026, the complete defence mutual fund list, and how to invest wisely.
What Are Defence Sector Mutual Funds?
Defence sector mutual funds are thematic equity funds that invest primarily in companies linked to defence and aerospace. This includes manufacturers of military equipment, aircraft, electronics systems, shipbuilding companies, and related engineering firms.
Unlike diversified equity funds, a defence mutual fund focuses on a single sector. Returns depend largely on defence spending, order inflows, exports, and government policy support.
Because of this concentration, these funds can deliver strong gains during sector growth phases but may also face higher volatility.
How Defence Mutual Funds Work
A defence mutual fund pools money from investors and invests it in listed companies operating in defence and allied industries. The fund may:
- Track a defence index (passive strategy), or
- Be actively managed, where the fund manager selects stocks within the sector
The portfolio usually includes public sector defence companies, private manufacturers, and firms supplying components or systems for defence projects.
Performance depends on government contracts, defence budget allocation, export orders, and policy decisions. Since the exposure is limited to one sector, performance can differ sharply from broader market indices.
Types of Defence Funds Available
Each type differs in cost, flexibility, and management style. Index funds and ETFs usually have lower expense ratios, while active funds attempt to generate higher returns through stock selection.
You will typically find three formats:
- Thematic Defence Mutual Funds: Actively managed funds investing in defence and related companies.
- Defence Index Funds: These track indices, such as the Nifty India Defence Index, and aim to mirror their returns.
- Defence ETFs: Exchange-traded funds that track defence indices and are traded on stock exchanges like shares.
Who Should Invest in Defence Mutual Funds?
Defence sector mutual funds may suit:
- Investors with a high risk appetite
- Those with a 5–10 year horizon
- Investors looking for satellite exposure in their portfolio
- People who understand sector cycles
They are not suitable as a core portfolio holding. Allocation should remain limited within overall equity exposure.
Why Invest in Defence Mutual Funds in 2026?
Interest in defence funds has increased due to structural changes in the sector. Budget growth, export expansion, and manufacturing policies are creating long-term opportunities for listed defence companies.
However, investing should be based on clear reasons rather than short-term momentum.
India’s Rising Defence Budget
India’s defence budget for 2025–26 stands at over ₹6.2 lakh crore. A significant portion is directed toward capital expenditure, including aircraft, ships, missiles, and advanced systems.
Higher capital allocation improves revenue visibility for defence manufacturers. Companies with strong order books benefit directly from such spending.
Export Opportunities for Indian Defence Companies
Indian defence exports have grown steadily over the last few years. Domestic companies are supplying equipment to multiple countries across Asia, Africa, and Europe.
Export diversification reduces dependence on domestic contracts and improves revenue stability. Companies with export capabilities may see stronger long-term growth.
Government’s Make in India Initiative
Under Make in India and Atmanirbhar Bharat, the government has pushed for local manufacturing of defence equipment. Policies include:
- Import substitution lists
- Production-linked incentives
- Support for private sector participation
This has increased opportunities for domestic companies and reduced reliance on foreign suppliers.
Geopolitical Factors Driving Growth
Global geopolitical tensions have increased defence spending across many countries. This has led to:
- Higher global demand for defence systems
- Strategic partnerships
- Increased focus on modernisation
While this supports sector growth, it also adds volatility. Policy changes and global events can impact stock prices quickly. For investors considering a defence mutual fund, understanding both growth drivers and risks is essential before allocating capital.
Complete List of Defence Mutual Funds in India
Defence mutual funds in India have expanded rapidly since 2024, largely tracking the Nifty India Defence Index and benefiting from strong sector growth. Below is a structured list of mutual funds, grouped by category.
Thematic Defence Funds
These funds invest broadly across defence-related themes, including aerospace, shipbuilding, missiles, electronics, and heavy engineering. They may also hold ancillary companies supplying to defence projects, offering relatively wider exposure within the theme.
- HDFC Defence Fund
- AUM: ~₹7,403 crore
- Top holdings: Bharat Electronics (BEL), HAL, Bharat Forge
- Actively managed
- Groww Nifty India Defence ETF FoF
- Passive Fund of Fund
- Invests in an underlying defence ETF
- Suitable for investors who prefer index-based exposure through a mutual fund format
Thematic funds may provide slightly broader diversification within the defence space but remain sector-focused.
Sector-Specific Defence Schemes
These are index funds that allocate at least 80% of their assets to defence-sector stocks. They closely track the Nifty India Defence Index and invest heavily in companies such as HAL, BEL, and BDL.
- Motilal Oswal Nifty India Defence Index Fund (Direct Growth)
- AUM: ₹3,893 crore
- Passive strategy
- Aditya Birla Sun Life Nifty India Defence Index Fund (Direct Growth)
- AUM: ₹787 crore
- Passive strategy
These funds aim to replicate index returns and usually carry lower expense ratios than actively managed thematic funds.
Defence-Focused ETFs vs Mutual Funds
Both ETFs and mutual funds provide exposure to the defence sector mutual funds, but they differ in structure, cost, and flexibility.
| Type | Examples | Key Differences |
| ETFs | Motilal Oswal Nifty India Defence ETF, Groww Nifty India Defence ETF | Lower cost (0.2–0.4%), intraday trading, passive tracking; suitable for investors comfortable with stock market transactions |
| Mutual Funds | HDFC Defence Fund, Motilal Oswal Index Fund, Aditya Birla Index Fund | SIP-friendly, daily NAV pricing, active or passive options; expense ratio typically 0.6–1.5% |
ETFs suit investors who want lower costs and trading flexibility. Mutual funds work better for long-term investors who prefer SIPs and automatic investing.
If you prefer starting small, Appreciate allows you to begin investing through a daily SIP at just ₹11, making it easier to build exposure to a defence fund gradually without deploying a large amount at once.
For broader diversification beyond India, you can also consider US ETFs through Appreciate. US ETFs provide access to global companies and can help balance a sector-specific allocation in your portfolio.
Conclusion
Defence mutual funds offer targeted exposure to a sector supported by rising government spending, domestic manufacturing policies, and growing exports. For investors who understand sector cycles, they can be a useful addition to a diversified equity portfolio.
That said, these are thematic investments. Limit allocation to a small portion of your overall equity exposure and review performance regularly.
If you want to start small, Appreciate allows you to begin investing with a Daily SIP at just ₹11. This makes it easier to participate in defence sector mutual funds without committing a large amount upfront.
You can also diversify beyond India through US ETFs available on Appreciate. US ETFs provide access to global companies and can help balance sector-specific exposure in your portfolio. Start with a plan, invest consistently, and review your allocation based on your risk appetite and long-term goals.
FAQs on Best Defence Mutual Fund in India
There is no single “best” defence mutual fund for everyone. That said, the Motilal Oswal Nifty India Defence Index Fund is often considered among the best defence mutual fund options for 2026 due to:
Strong recent performance (around 32–41% over six months as per recent data)
Tracking the Nifty India Defence Index
Exposure to companies like Bharat Electronics and HAL
Before investing, check recent returns, expense ratio, and portfolio concentration.
Here is a commonly referred defence mutual fund list in India:
Motilal Oswal Nifty India Defence Index Fund
HDFC Defence Fund
Aditya Birla Sun Life Nifty India Defence Index Fund
Motilal Oswal Nifty India Defence ETF
Groww Nifty India Defence ETF FoF
These defence sector mutual funds invest primarily in aerospace, defence manufacturing, and related companies aligned with government initiatives like Make in India.
Yes, defence mutual funds can be suitable for a 5–10 year horizon. Reasons include:
Rising defence budget (₹6.2 lakh crore for 2025–26)
Push for domestic manufacturing
Growing defence exports
However, they are sector-specific funds. Returns can be volatile due to policy changes and geopolitical events. They should not form the core of your portfolio.
Limit exposure to 10–15% of your equity allocation. Use them as satellite holdings alongside diversified equity funds. This helps manage sector concentration risk.
You can start small through SIPs, often from ₹500 per month. With Appreciate, you can even start investing with a Daily SIP at just ₹11, making it easier to build exposure gradually without committing large sums upfront.
Yes. Most defence mutual fund schemes allow SIP investments. SIP helps average purchase cost in a volatile sector like defence. Instead of investing a lump sum, regular investments reduce timing risk. Through Appreciate, you can begin with a Daily SIP of ₹11 and build your position steadily.
Defence funds are treated as equity mutual funds for taxation.
Short-Term Capital Gains (≤12 months): 20%
Long-Term Capital Gains (>12 months): 12.5% on gains above ₹1.25 lakh
Dividends are taxed as per your income slab
Plan your holding period accordingly to optimise post-tax returns.
Disclaimer: Investments in securities markets are subject to market risks. Read all the related documents carefully before investing. The securities quoted are exemplary and are not recommendatory.
