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Did you know that since Operation Sindoor on May 7 2025, the Nifty Defence Index TRI has seen a 22% rally in comparison to the Nifty 500 TRI that barely moved with a 3% gain, leaving Defence Mutual Funds
as the favourite stock in the market?
Although defence funds have garnered a lot of limelight, especially due to geopolitical sparks between India and Pakistan, the big question is, "Will this wave continue in the long term?"
Let's quickly take an overview of the points that will be covered in this post:
- Nifty Defence Index jumps 22% post Operation Sindoor, while Nifty 500 barely gains 3%.
- Defence mutual funds see 60% gains, grabbing investor attention.
- HDFC Defence Fund vs Defence Index: Highly concentrated portfolios with 62% overlap.
- Returns history: 519% rally from Jan 2022 to Jul 2024, followed by a sharp correction.
- Should you invest now? High returns come with high risks — caution advised.
What do Defence Funds Hold?
The defence fund space is still young. There’s just one actively managed fund that is, the HDFC Defence Fund. It has been around for nearly two years. The rest are young. Five passive options (including ETFs and FoFs) tracking the Nifty India Defence Index, none of which has been completed even a year.
Against this backdrop, let’s take a closer look at what these Mutual Funds are loading up on. For passive funds, you will look at the largest constituents of the defence index since that is what they mirror.
Top 5 Holdings of HDFC Defence Fund Vs Nifty India Defence Index
As per the updated data as on 31 May, 2025, the top holdings of HDFC Defence fund vs the Nifty India Defence Index are given in the table below:
HDFC Defence Fund | Nifty India Defence Index |
---|---|
Hindustan Aeronautics – 20.3% | Bharat Electronics – 18.62% |
Bharat Electronics – 19.3% | Hindustan Aeronautics – 16.07% |
Solar Industries India – 14.5% | Solar Industries India – 16% |
BEML – 9.3% | Mazagon Dock Shipbuilders – 8.75% |
Astra Microwave Products – 5.5% | Bharat Dynamics – 7.61% |
A quick observation tells you that the top three holdings are identical in both the HDFC Defence Fund and the index, nearly carrying the same weights.
Together, these three stocks make up a hefty 54 per cent of the portfolio. Zooming out a bit, the top five stocks account for 69 per cent of the HDFC fund and 71 per cent of the index fund. In short, both portfolios are highly concentrated, with just a handful of stocks driving the bulk of the performance.
Also, it is interesting to note that HDFC Defence Fund has almost 62% overlap with the index.
Defence Funds Returns History
From January 2022 to July 2024, the Nifty India Defence Index grew by a whopping 519%, giving investors nearly double their money every year. In comparison, the broader Nifty 500 gave a decent, but much lower, 19% yearly return.
However, after reaching its peak in July 2024, the defence sector faced a sharp correction. By February 2025, many defence stocks had lost value. This drop affected investor confidence and reminded everyone that even high-growth sectors can go through rough patches.
Defence Mutual Funds See 60% Gains: Is It Good Time to Invest?
Defence mutual funds have gained 60% recently, which looks very exciting. But before jumping in, it’s important to understand the risks and timing.
Impact in Simple Words:
- High returns = high risk. Defence funds focus only on one sector, so if that sector falls, the entire fund can take a big hit.
- For example, during past corrections:
- Defence funds dropped 37% in a few weeks.
- In the Covid crash, they fell 43%, more than the broader market.
This shows that while defence funds can grow fast when the sector is doing well, they can also fall sharply when the market turns.
So, is it a good time to invest?
Not necessarily. After a 60% rally, prices may already be high. Jumping in now could mean buying at the peak, which is risky.
What You Can Do:
- If you are interested, invest only a small amount (say 5-10% of your portfolio).
- Be ready for ups and downs.
- It's safer to go with diversified funds if you want steady, long-term growth.
In short: Defence funds offer big rewards, but they are not for everyone. Invest carefully, not emotionally.