Opportunity to invest in the defense sector, these 3 mutual funds can give better returns

The defense sector in India is no longer just a matter of government policy, but has become a solid investment opportunity. The Union Budget 2025 allocated over ₹6.81 lakh crore for defense. 

It is believed that this expenditure may increase further in the 2026 budget due to rising global tensions. Most importantly, India now procures approximately 75% of its defense needs domestically, compared to less than 60% five years ago.

Orders received by defense and aerospace companies have increased rapidly. The government aims to achieve defense exports worth ₹50,000 crore by FY30, compared to ₹23,620 crore in FY25. 

This is why defense-related stocks have delivered strong returns over the past three years. Seizing this opportunity, several fund houses have launched defense-themed mutual funds to enable investors to participate in the sector's growth.

Invesco India PSU Equity Fund

This fund was launched in January 2013 and primarily invests in government-owned companies. As of December 31, its AUM was approximately ₹1,449 crore. 

The fund's expense ratio is 0.9%, which is considered normal for a thematic fund. 

Approximately 98% of the fund's funds are invested in equities, with significant exposure to the banking, aerospace-defense, power, and petroleum sectors.

Its top holdings include SBI, Bharat Electronics, BPCL, Indian Bank, and NTPC Green. Over the past 10 years, this fund has generated an average annual return of 17.87%, which is better than its benchmark.

HDFC Defence Fund

This is a new fund, launched in June 2023. Its AUM is approximately ₹7,391 crore. This fund primarily invests in companies in the defense and related sectors. Its expense ratio is 0.8%. 

Approximately 99% of the fund's corpus is invested in equities. Its top holdings include Bharat Electronics, Hindustan Aeronautics, Bharat Forge, Solar Industries, and BEML. Over the past year, this fund has returned approximately 13.09%, which is better than the Defense Index.

Canara Robeco Manufacturing Fund

This fund launched in March 2024. It is based on a manufacturing theme, with significant exposure to the defense and aerospace sectors. Its AUM is approximately ₹1,642 crore and its expense ratio is 0.79%. 

Approximately 98% of the fund's investments are in equities. Its portfolio includes companies from the industrials, auto, materials, energy, and healthcare sectors. However, its return over the past year has been approximately 2.74%, which is lower than its benchmark.