Why are Defence Funds the Hottest Category in Mutual Funds?

The stock market is a dynamic place, with different sectors constantly gaining and losing favour.  Investors are always searching for promising opportunities, and currently, the defence sector is attracting a lot of attention. This has also made mutual funds that specialize in defence stocks a very popular choice among investors right now.

But why exactly are defence funds generating so much buzz? Let’s delve into the factors making defence funds attractive to investors in 2025.

The Rising Popularity of Defence Funds

Several key factors contribute to the growth and attractiveness of the defence sector:

1.   Escalating Geopolitical Tensions

The increasing geopolitical tensions worldwide have created a robust environment for defence sector investments. Major powers are significantly expanding their military budgets in response to evolving security challenges.

This has resulted in a significant increase in defence spending, creating a fertile ground for the growth of defence companies. As governments allocate more funds to the sector, defence companies experience increased revenues and profitability, making them attractive investment targets.

2. Government Push for Atmanirbhar Bharat (Self-Reliance)

India is doubling down on self-reliance in defence manufacturing under the Atmanirbhar Bharat initiative. Policies like the Defence Production and Export Promotion Policy (DPEPP) and increased FDI limits are boosting domestic defence firms.

3. Rising Defence Budgets

The Union Budget 2025 shows India’s strong push for self-reliance in defence and national security. The government has set aside ₹6.81 lakh crore for defence, which is 9.5% more than last year. Out of this, ₹1.8 lakh crore is specifically for upgrading military equipment. This means more investment in homegrown fighter jets, helicopters, drones, and advanced weapons. The goal is clear—reduce dependence on imports and make India a major hub for defence manufacturing under the Atmanirbhar Bharat initiative.

4. Consistent Order Flow and Revenue Visibility

Unlike volatile sectors like IT or real estate, defence companies enjoy long-term government contracts, ensuring stable revenue. With continuous order inflows, investors feel confident in the sector’s growth potential. Many defence companies operate in niche areas with little competition, leading to strong profitability.

Impact on Mutual Funds

The robust growth of the defence sector has a cascading effect on mutual funds like Aditya Birla Mutual Funds that invest in defence stocks:

• High-Growth Potential: The defence sector’s high-growth potential makes it an attractive investment for mutual funds. Companies actively participating in boosting the sector’s economy offer opportunities for reasonable returns for investors.
• Economic Expansion: Increased demand for high-quality defence products benefits local companies by improving their production efficiency.
• Substantial Returns: The Nifty India Defence Index – TRI, which tracks the performance of listed defence companies, has delivered substantial returns, creating wealth for investors.

Who Should Invest in Defence Funds?

You should consider investing in defence mutual funds if:

• You have a high-risk tolerance and can handle market fluctuations.
• You’re looking for long-term growth backed by increasing defence spending and strong government support.
• You already have a well-diversified portfolio and want to add an emerging high-growth theme.
• You understand that defence stocks are cyclical and require a long-term investment horizon (5+ years).

Conclusion

Defence funds are undoubtedly the hottest category in mutual funds right now. The sector is set for long-term growth with strong government policies, rising defence budgets, and steady order flows. However, it’s crucial to remember that like any investment focused on a specific theme or industry, defence funds come with their own set of risks. The limited number of listed companies can lead to concentration risk.

Before you jump in, it’s essential to carefully consider your own comfort level with risk and how long you plan to invest your money.