Defence mutual funds rally 70% in 3 months amid geopolitical tensions, defence firms order surge

Recently, India's defence sector has been in the spotlight after witnessing some interesting developments amid recent geopolitical tensions with Pakistan, which is in line with strategic government initiatives to increase military capabilities and promote domestic manufacturing.

In the recent Union Budget, the Indian government had announced a 9.53 percent increase in its 2025-2026 defence budget, allocating Rs. 6.81 trillion. This includes Rs. 1.8 trillion for the capital budget of the armed forces, with 75 percent of procurement funds reserved for domestic defence production to reduce import dependency. Concurrently, pensions consume around 23.6 percent (Rs. 1.6 trillion) of the budget, reflecting fiscal challenges.

Defence Exports Surge

With the domestic manufacturing push, India’s defence exports reached Rs. 23,622 crore in FY 2024-25, which marks a 12.04 percent year-on-year growth. Recently, Defence Minister Rajnath Singh said that the government aims to exceed Rs. 30,000 crore in exports in 2025 and is targeting Rs. 50,000 crore by 2029. The key export destinations include the US, Israel, Armenia and Germany, which is driven by demand for artillery shells, small arms, and indigenously developed systems.

The government has actively introduced several policy reforms in recent years to boost the Indian defence industry. These include simplifying the industrial licensing procedure, removing parts and components from the license regime, and extending the license validity period. Additionally, it further simplified the SOP for granting export authorisation and added more provisions in the last financial year to promote defence exports.

Defence Shares Rally

On the back of these developments, shares related to the defence sector surged in 2025 due to heightened geopolitical risks and increasing order books. Defence shares like Garden Reach Shipbuilders and Engineers (80.81%) year-to-date return, followed by Bharat Dynamics (70.53%) and Mazagon Dock Shipbuilders (65.21%), Paras Defence (61.58%). Top defence companies like Hindustan Aeronautics delivered 19.71%, Bharat Electronics (31.76%), and Solar Industries India (62.77%), respectively.

The NIFTY India Defence Index rose around 35% in the same period, reflecting sector-wide optimism. Operation Sindoor, India’s counterterrorism strike, further boosted investor confidence, highlighting military readiness and ensuring security concerns are looked at.

Defence Sector Mutual Funds

Due to the significant stocks rally, defence mutual funds have delivered exceptional returns, averaging around 69% over three months. Below are the top performers and their Sharpe ratio:

*Note: The above funds have high P/E and P/B ratios. These are sectoral or thematic funds and might perform well during an industry uptrend compared to the benchmark. During industry downturns, it might underperform, and the industry upcycle should be tracked constantly to make decent returns. These funds are better for seasoned investors, and they pose a high risk to the invested capital.

Market analysts attribute the rally due to strong earnings growth of some companies, increased defence budgets, and geopolitical triggers like the India-Pakistan border clashes. However, they caution against short-term investments due to high valuations while recommending stepwise investments for long-term exposure. You can invest in Defence Mutual Funds through Rupeezy after necessary KYC compliance to track your investments at ease. Always consult a financial advisor or do your research before investing.