India’s defence sector is no longer operating in the background of the economy. It has moved firmly into the spotlight, backed by strong policy intent and rising budgetary support. The Union Budget for FY26 has earmarked an outlay of ₹6,81,000 crore, or about US$ 78.7 billion, for defence spending, marking a 9.5 percent increase over the FY25 allocation. This renewed commitment signals the government’s focus on strengthening domestic capabilities, boosting self-reliance, and expanding defence manufacturing.
- What Is a Defence ETF?
- Top Defence Mutual Funds and ETFs for 2026
- How Stocks Are Selected in Defence ETFs
- Top 5 Defence Sector Stocks in India (Jan 2026)
- Why Defence Mutual Funds Are Gaining Attention
- Key Growth Drivers Behind the Defence Theme
- The Road Ahead for Defence ETFs and Mutual Funds
- The Bottomline
For investors, this steady rise in defence spending is translating into a compelling long-term opportunity. Defence ETFs and defence mutual funds are increasingly being tracked as structured ways to participate in India’s defence growth story without the complexity of selecting individual stocks. With policy support, rising capital expenditure, and growing market participation, the defence theme is fast emerging as a key segment within India’s equity landscape.
(Source: IBEF)
What Is a Defence ETF?
A Defence ETF is a thematic exchange traded fund that invests in companies engaged in defence and aerospace manufacturing, systems development, and allied services. These funds track the Nifty India Defence Index, which reflects the performance of listed companies that are closely linked to India’s defence ecosystem.
Unlike actively managed funds, Defence ETFs follow a passive investment approach. They aim to mirror the returns of the underlying index, offering investors diversified exposure to the defence sector through a single listed instrument.
Top Defence Mutual Funds and ETFs for 2026
| Investment Name | Type | 1-Year Return (Approx.) | Launch Date | Expense Ratio (Direct) |
|---|---|---|---|---|
| Motilal Oswal Nifty India Defence ETF | ETF | 33% | 2024 | 0.41% |
| Groww Nifty India Defence ETF | ETF | 32% | 2024 | 0.43% |
| Aditya Birla Sun Life Defence Index Fund | Index Fund | 23% | 2024 | 0.33% |
| HDFC Defence Fund | Active Mutual Fund | 18% | 2024 | 0.80% |
(Source: Business Standard, Moneycontrol, AMFI Data as of Jan 14, 2025)
The data shows that Defence ETFs have delivered strong short-term returns, while defence mutual funds offer varying outcomes depending on management style and portfolio strategy.
How Stocks Are Selected in Defence ETFs
The Nifty India Defence Index follows a clearly defined selection methodology to ensure focused exposure to the sector.
Key elements of the index methodology include:
- Universe Selection: Stocks are selected from the Nifty Total Market Index.
- Eligibility Criteria: A company must either belong to eligible defence-related industries or derive at least 10 percent of its revenue from defence activities.
- Ranking and Capping: Eligible stocks are ranked based on their six-month average free-float market capitalisation, with individual stock weights capped at 20 percent.
This setup makes sure the fund doesn’t rely too heavily on just one or two companies, while still keeping the focus firmly on the defence sector
(Source: NSE)
Top 5 Defence Sector Stocks in India (Jan 2026)
| Name | CMP (₹) | Market Cap (₹ Cr) | P/E Ratio |
|---|---|---|---|
| Bharat Electronics | 417.60 | 3,05,256.36 | 53.59 |
| Hind. Aeronautics | 4,461.40 | 2,98,367.28 | 35.23 |
| Bharat Dynamics | 1,513.60 | 55,482.90 | 84.82 |
| Garden Reach Sh. | 2,431.00 | 27,847.59 | 45.18 |
| Data Patterns | 2,578.50 | 14,435.47 | 61.84 |
(Note: The Data is as of Jan 14, 2025 and ranked on the basis of Market Capitalisation, Source: Screener)
Why Defence Mutual Funds Are Gaining Attention
Alongside Defence ETFs, defence sector mutual funds are also attracting interest from investors seeking targeted exposure. Rising government spending, initiatives such as Aatmanirbhar Bharat, and growing defence exports have strengthened the long-term outlook for defence-related companies.
Defence mutual funds allow fund managers to actively select stocks within the theme, offering flexibility to adjust portfolios as sector dynamics evolve. This approach may appeal to investors who are comfortable with higher risk in pursuit of potentially better risk-adjusted returns.
(Source: The Economic Times)
Key Growth Drivers Behind the Defence Theme
Several structural factors continue to support the defence investment narrative:
- Rising Domestic Production and Exports: India’s push to manufacture defence equipment locally has expanded opportunities for listed defence companies.
- Focused Thematic Exposure: Defence ETFs and defence mutual funds concentrate on a narrow set of beneficiaries, which can amplify returns when the sector performs well.
- Growing Retail Participation: Strong recent performance in defence stocks and Defence ETFs has increased visibility and investor participation.
(Source: PIB)
The Road Ahead for Defence ETFs and Mutual Funds
Defence ETFs and defence mutual funds are increasingly seen as long-term plays on India’s strategic and manufacturing ambitions. However, they are best suited for investors who understand sectoral cycles and can tolerate short-term volatility.
As India continues to expand its defence capabilities and exports, the sector’s investment relevance is likely to remain intact. For investors looking to align their portfolios with India’s growth priorities, Defence ETFs and defence mutual funds offer a focused and accessible route.
The Bottomline
India’s defence growth story has moved from policy intent to measurable results. Record production numbers, strong index performance, and rising investor participation underline the sector’s growing importance. Defence ETFs provide low-cost, transparent exposure, while defence mutual funds offer active strategies within the same theme.
For long-term investors with a clear understanding of risks, Defence ETFs and mutual funds can play a strategic role in a diversified portfolio.
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