Defence Funds Deliver 19% Returns in 2026, HDFC Defence Fund Leads: Should Investors Chase the Rally or Stay Cautious?

Defence Funds Deliver 19% Returns in 2026

Defence-focused mutual funds have delivered strong returns in 2026, with the category generating an average return of around 19% year-to-date, according to an ETMutualFunds analysis.

HDFC Defence Fund led the category with a 24.51% return during the period. The fund is currently the only actively managed mutual fund focused specifically on the defence sector, according to the Economic Times report.

Other defence-focused products also delivered strong gains. Groww Nifty India Defence ETF FoF returned around 18.30%, while Aditya Birla Sun Life Nifty India Defence Index Fund delivered approximately 17.42% in 2026 so far. 

The strong performance has brought renewed attention to defence funds, but the recent rally also raises the question of whether investors should increase exposure or review their existing allocations.

HDFC Defence Fund Leads the Defence Fund Category

HDFC Defence Fund delivered the highest return among the defence-focused funds covered in the ETMutualFunds analysis, with a 24.51% gain in 2026 so far.

The fund has also delivered a strong longer-term record. It is the only defence sector fund in the group with a three-year performance history, and it generated a return of around 34.49% over the last three years, according to the report. 

Over the last six months, defence-sector funds delivered returns of up to approximately 23.88%, with HDFC Defence Fund again leading the performance table.

However, strong historical returns do not guarantee similar returns in the future.

Defence Sector Funds: 2026 Performance

Defence Fund2026 ReturnHDFC Defence Fund24.51%Groww Nifty India Defence ETF FoF18.30%Aditya Birla Sun Life Nifty India Defence Index Fund17.42%Defence fund category averageAround 19%

Returns are 2026 year-to-date figures reported in the Economic Times/ETMutualFunds analysis. 

Why Are Defence Stocks and Funds Rallying?

Several structural factors have supported the defence sector.

One major factor is the increase in India's defence spending and capital expenditure. The Economic Times report noted that India's defence capital budget increased from approximately Rs 1.13 lakh crore in FY20 to Rs 2.19 lakh crore in FY27.

Government initiatives encouraging domestic manufacturing and self-reliance have also created opportunities for Indian defence companies.

Other factors supporting the sector include:

• Higher government defence spending

• Domestic procurement policies

• Growing defence order books

• Increasing manufacturing capabilities

• Rising defence exports

• Global demand for defence equipment

• Greater focus on indigenous defence technology

These factors have contributed to optimism around the long-term growth prospects of Indian defence companies. 

Strong Order Books Are Supporting Earnings Visibility

Vishal Dhawan, Founder and CEO of Plan Ahead Wealth Advisors, told ETMutualFunds that government policies supporting self-reliance, along with higher global defence capital allocations, are supporting order pipelines.

He also pointed to the strong contract and order books of major defence companies as a potential source of earnings visibility over several years.

Growing international demand could provide another potential growth avenue. Indian companies are increasingly looking at export markets in addition to domestic government procurement. 

However, a large order book does not automatically guarantee future earnings. Companies still need to execute contracts successfully, maintain margins and convert orders into revenue and cash flows.

Defence Fund Valuations Are a Key Concern

The sharp rise in defence stocks has also increased valuation concerns.

Dhawan told ETMutualFunds that current stock prices already reflect expectations of future earnings growth after the recent rally. According to him, elevated valuations could leave less margin of safety for investors.

This means that even if the underlying defence businesses continue to perform well, stock and fund returns may not necessarily match the pace seen in 2026 so far. 

For investors, the distinction between good business prospects and attractive stock valuations is important.

A company can have strong long-term growth prospects while its stock is already priced to reflect much of that expected growth.

Defence Funds Can Be Highly Volatile

Defence-sector investing also carries concentration risk because these funds focus on a relatively narrow group of companies and industries.

The sector has experienced sharp rallies as well as corrections in the past. The Economic Times report noted that defence stocks and funds declined by around 15%–20% between mid-2024 and early 2025.

This illustrates that a strong structural story does not prevent short-term corrections. 

Investors therefore need to be prepared for periods when defence funds underperform broader diversified equity funds.

Should Existing Investors Continue Their Allocation?

For investors who already own defence funds, the key issue is the size of the allocation within the overall portfolio.

Vishal Dhawan suggested checking whether the recent rally has pushed defence exposure above 5% of the total portfolio. If exposure has become disproportionately large, investors could consider rebalancing toward broader diversified funds.

Hrishikesh Palve, Director at Anand Rathi Wealth, similarly advised existing investors to review their overall portfolio and assess whether defence has become an oversized allocation.

For example, if defence exposure has grown substantially because of the rally, rebalancing can help reduce concentration risk rather than making an emotional decision to either exit completely or add aggressively. 

Should New Investors Chase the Rally?

Experts quoted by ETMutualFunds have cautioned against entering defence funds solely because of their recent returns.

Palve said investors should avoid making investment decisions based on recency bias. A fund delivering strong returns over several months does not mean the same rate of appreciation will continue.

Sector funds can also introduce concentration risk because their portfolios are restricted to a particular theme or industry.

Investors who want defence exposure may already receive some indirect exposure through diversified equity funds that own defence companies.

SIP or Lump Sum After the Rally?

For investors who do not currently have defence exposure, the method of investing becomes another consideration.

Palve preferred a SIP approach over a large lump-sum investment after a sharp rally. If investors have a substantial amount to deploy following a correction, he suggested staggering the investment across several instalments rather than investing everything at once.

Dhawan also cautioned against putting a large lump sum into a sector after a significant run-up.

A staggered approach can reduce the risk of committing the entire investment at a single market level. However, SIPs do not eliminate market risk or guarantee returns.

Defence Exposure Through Diversified Funds

Investors do not necessarily need a dedicated defence fund to participate in the sector's growth.

Diversified equity funds such as flexi-cap, multi-cap and large-and-mid-cap schemes can hold defence companies alongside businesses from other sectors.

This can reduce the concentration associated with a dedicated sector fund.

For investors who already have diversified equity exposure, it is therefore important to check the underlying portfolios before adding a dedicated defence fund. There may be overlap between the defence fund and existing schemes.

India's Defence Export Opportunity

The long-term outlook for India's defence sector is also being supported by growing export ambitions.

The Economic Times report cited a Jefferies estimate that Indian defence exports could grow at around 11% annually through fiscal 2030, potentially reaching approximately Rs 58,400 crore.

Indian companies could potentially benefit from demand for missiles, artillery and electronic systems, while European defence spending could create opportunities for Indian companies to participate as component and subsystem suppliers. 

However, export growth depends on factors including international competition, product approvals, delivery capabilities, geopolitical developments and the ability of Indian manufacturers to scale production.

What Should Investors Check Before Investing?

Past returns should not be the only factor investors consider before selecting a defence fund.

Important factors include:

• Current portfolio valuation

• Individual stock concentration

• Exposure to major defence companies

• Overlap with existing mutual funds

• Three- and five-year performance where available

• Rolling returns

• Maximum drawdown

• Fund expense ratio

• Fund manager's investment approach

• Overall portfolio allocation

• Investment horizon

• Risk tolerance

Investors should also distinguish between the outlook for the defence industry and the valuation of individual companies.

A positive industry outlook does not automatically mean every defence stock or defence fund will generate strong returns.

What Could Happen After the Rally?

The recent performance has created two competing possibilities for investors.

If defence companies continue to receive strong orders, improve execution and expand exports, the sector could continue to benefit from the long-term growth theme.

At the same time, high valuations can increase the possibility of consolidation or corrections if earnings growth does not meet market expectations.

Therefore, investors may need to focus on portfolio allocation and valuation discipline rather than attempting to predict the next short-term move in defence stocks.

Bottom Line

Defence-sector mutual funds have delivered an average 19% return in 2026 so far, with HDFC Defence Fund leading at 24.51%. Groww Nifty India Defence ETF FoF and Aditya Birla Sun Life Nifty India Defence Index Fund also delivered strong gains of around 18.30% and 17.42%, respectively. 

The sector's performance has been supported by higher defence spending, government policies promoting domestic manufacturing, strong order books and growing export opportunities.

However, experts cited by ETMutualFunds have cautioned investors against chasing the rally. Elevated valuations, sector concentration and the possibility of future corrections remain important considerations.

For existing investors, reviewing whether defence exposure has become too large within the overall portfolio may be more important than simply deciding whether to hold or sell based on recent returns. For new investors, a diversified approach or staggered investing may help manage the risks associated with entering after a sharp rally.

The key takeaway is that strong recent returns should be treated as historical performance, not as an expectation of future returns.