Defence mutual funds gain up to 39% in 3 months. Should you join the rally or stay cautious?

Time of India

02-07-2025

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Defence sector based mutual funds have delivered stellar returns in the past three months, with some schemes offering gains of up to 39%. The average return for the category stands at a strong 36.98%. Around six funds in the category have marked their presence in the market in the said time period. Motilal Oswal Nifty India Defence ETF offered a gain of 38.58% in the last three months, followed by defence funds of Groww Mutual Fund. Groww Nifty India Defence ETF and Groww Nifty India Defence ETF FOF offered a return of 38.48% and 38.32% respectively in the similar time period.In the said time period, defence based two index funds - Motilal Oswal Nifty India Defence Index Fund and Aditya Birla SL Nifty India Defence Index Fund posted a return of 38.27% and 38.21% respectively. HDFC Defence Fund , the only actively managed fund based on the defence sector, posted a return of 30.04% in the same time period.Experts believe that the sharp rally in the sector was driven by several factors such as rising government expenditure on defence modernisation, supportive policies like Make in India, Atmanirbhar Bharat and increase in geopolitical tensions.Hrishikesh Palve, Director at Anand Rathi Wealth Limited is of the opinion that the sector remains very sensitive to geopolitical events and similar sharp rallies have occurred in the past usually followed by phases of consolidation or corrections as the sentiment cools off.'Given this volatility, investing in sectorial/thematic funds is not recommended as it requires tactic entry & exit to ride the performance which is not suitable for regular investors,' Palve shared with ETMutualFunds.Echoing similar opinion, Sagar Shinde, VP Research, Fisdom told ETMutualFunds that PSU defence companies like HAL, BEL, and BDL have reported healthy order books, margin expansion, and earnings growth. 'Additionally, heightened geopolitical tensions have further increased interest in the sector, both domestically and globally, fueling investor optimism,' Shinde added.These funds have demonstrated similar performance in the last six months as the funds offered up to 39% return with an average return of 35.29%. Motilal Oswal Nifty India Defence ETF offered a gain of 38.73% in the last six months.Also Read | JioBlackRock Overnight Fund opens for subscription. Who should invest? Motilal Oswal Nifty India Defence Index Fund delivered a return of 38.24% in the last six months. Groww Nifty India Defence ETF FOF and HDFC Defence Fund gained 36.60% and 21.94% respectively in the last six months.After analysing the past performance of these funds, Shinde said that given the sharp rally, the current valuations appear stretched, making a large lumpsum entry risky and investors with a high-risk appetite and a 3–5 year horizon may consider selective exposure.On the other hand, Palve while cautioning the investors said that one should keep in mind that investing in the defence sector, or any sectoral/thematic strategy, comes with its own set of challenges as these sectors often experience cyclical performance and require timely entry and exit to capitalise on momentum, which can be difficult for most investors to navigate, therefore, chasing current momentum in such sectors is not advisable.Out of six available funds based on the defence sector, five are passive funds whereas only one is active funds and with passive funds delivering stellar performance compared to active funds, Shinde mentions that, 'Passive funds are preferred, as they have consistently outperformed active peers by a wider margin and also have a better cost advantage. To manage timing risks, a staggered SIP approach is more prudent than a lumpsum investment.'According to a report by ETMarkets, recently defence stocks witnessed a surge after NATO allies agreed to hike defence spending and the move is being seen as a big export opportunity for Indian defence firms.'In a five-point statement issued on Wednesday, NATO leaders backed the big increase in defence spending that US President Donald Trump had demanded, and restated their commitment to defend each other from attack after a brief summit in the Netherlands,' the report mentioned.Also Read | Beyond JioBlackRock: Eight other mutual fund NFOs open for subscription this week The further highlighted that the new spending target - to be achieved over the next 10 years - is a jump worth hundreds of billions of dollars a year from the current goal of 2% of GDP, although it will be measured differently and countries have pledged to spend 3.5% of GDP on core defence - such as troops and weapons - and 1.5% on broader defence-related measures such as cyber security, protecting pipelines and adapting roads and bridges to handle heavy military vehicles.With an increase in investor confidence in the sector and hike in defence spending, the experts caution investors with short term volatility in the sector due to stretched valuations and potential profit booking.Shinde believes that the investors should enter with calibrated expectations and a long-term mindset. 'The medium to long-term outlook remains constructive, supported by strong policy tailwinds, increasing defence exports, and greater focus on self-reliance. However, short-term volatility cannot be ruled out due to stretched valuations and potential profit booking. Investors should enter with calibrated expectations and a long-term mindset,' he added.While mentioning that the sector has potential to move higher supported by favourable government policies and long-term capital commitments, Palve advises investors not to focus solely on any one sector rather focus on broad-based diversified equity funds.'Looking ahead, the defence sector has the potential to move higher, supported by favourable government policies and long-term capital commitments. However, current valuations suggest the sector appears overheated, with a high degree of froth. This shows that the optimism around future positive events such as order wins, export growth and policy tailwinds may already be priced in. Hence, a phase of mean reversion would not be surprising,' Palve commented.'Thus, it is not advisable for investors to invest solely in any single sector, as it increases the concentration risk. Instead they are recommended to invest in broad based diversified equity funds such as market cap based funds and strategy-based funds which gives exposure across sectors,' he advised.Thematic or sector schemes invest most of their corpus in a particular sector, and the performance of schemes is based on performance of the sector. That is why thematic or sector funds are recommended only to investors with thorough knowledge about the sector.You should invest in these schemes only if you have a long investment horizon or have intimate knowledge about the sector to time the entry and exit in these schemes. Remember, every sector or theme can go out of fashion depending on the economic conditions. You should not make hasty decisions in those phases.: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)If you have any mutual fund queries, message on ET Mutual Funds on Facebook/Twitter. We will get it answered by our panel of experts. Do share your questions on [e-mail] alongwith your age, risk profile, and Twitter handle.