Defence stock rally spells relief for dedicated mutual fund schemes

A sharp rebound in defence stocks has helped sector-focused mutual fund schemes recover steep losses, offering relief to investors who entered after the 2024 peak

The India-Pakistan tensions and the subsequent rally in defence stocks has brought relief to defence mutual fund (MF) scheme investors, many of whom entered the theme after it had run up substantially.

 

Defence funds, most of which were launched last year and were also able to attract strong inflows, were caught on the wrong side of the market as the correction in defence stocks in the second half of the 2024-25 (FY25) brought their net asset values (NAVs) below the launch level of ₹10.

 

The defence sector, among the smallest in terms of investment universe, witnessed the first dedicated MF offering — HDFC Defence Fund's launch in June 2023. It remains the only active fund in the defence space. 

 

A year after the debut of the first fund, three fund houses introduced five offerings in the defence space. Motilal Oswal, Aditya Birla Sun Life, and Groww launched passive funds tracking the Nifty India Defence Index during the July-October 2024 period. 

 

However, these schemes were launched at a time when the theme had already run its course. The Nifty India Defence Index had peaked in July 2024 after more than doubling in the previous nine months. The performance had led to strong inflows into existing schemes as well as new launches. The Motilal Oswal Nifty India Defence Index Fund had collected ₹1,676 crore during the new fund offering (NFO) period, the highest by an equity index fund at that time.

 

However, as defence stocks corrected after July, the schemes witnessed major losses. The Nifty India Defence Index had corrected over 38 per cent from its peak till February 18, 2025. The index has bounced back 62 per cent since then to achieve a new high of 9,146 (as of May 21).

 

The correction had led to major losses for investors with the NAVs of newly launched schemes going over 30 per cent below the launch level. The recent rally has wiped out the losses.   

 

Experts say that while the long-term outlook remains healthy for the sector, investors should be cautious while betting on the theme.

 

"Nifty Defence index has seen a sharp runup over the past three months due to robust government policy support and geopolitical tensions. Despite the runup, companies with strong order books and proven execution capabilities still offer reasonable value. However, investors are advised to monitor for signs of overheating and to conduct thorough due diligence before making new investments," said Ravi Singh, senior vice-president of retail research at Religare Broking.