HDFC Defence Fund NFO: Should You Invest In Defence Funds?

India is situated at a very critical and strategic geographical location on the world map. 

Being the largest peninsula and surrounded by Pakistan and China, there is every reason for the Indian government to spend heavily on its defence budget. The recent union budget allocated INR 7.65 lakh crore for defence, which is more than 15% than the previous year.¹ With the recent entry of private sector players in core defence equipment manufacturing that includes drones and missile sub-systems, the sector has attracted the attention of investors. 

For investors looking to tap into this growth, new fund launches focused on defence are gaining attention. The HDFC Defence Fund NFO is one such offering that aims to capitalise on the long-term potential of India’s defence ecosystem. However, just like any sector-based fund, you need to carry out proper research before investing. 

About HDFC Defence Fund NFO

The HDFC Defence Fund NFO was launched in May 2023. It witnessed a very strong investor interest. It is a thematic equity mutual fund that is designed to generate long-term capital appreciation by investing largely in companies operating within the defence and allied sectors.

The fund aims at allocating 80% of the total corpus to equity and equity-related instruments of defence and allied companies. It is an open-ended equity fund that allows investors to enter and exit at the prevailing NAV. 

It is positioned as a high risk, high return offering and suits investors with a high risk appetite. 

India’s Defence Sector: Growth Drivers

Anyone who has been following the recent news understands the kind of volatile world we live in. There are conflicts and struggles in almost all parts of the world, including India, where it launched Operation Sindoor after the Pahalgam Attack, destroying numerous terror bases in Pakistan. The recent conflicts and wars are largely fought through drones, missiles, and high tech devices and not through boots on the ground soldiers. 

Due to the ongoing geopolitical situations, the government has been increasing the defence budget, and the overall participation of the private sector in key defence manufacturing has increased rapidly in the past decade. 

Another key factor is the push for indigenization through initiatives such as ‘Atmanirbhar Bharat’. Import restrictions on defense equipment and incentives for domestic production are encouraging local manufacturing. 

This shift is expected to benefit both public sector undertakings and private players.

The government has also come up with PLI (Production Linked Incentive) schemes that encourage Indian defence manufacturers to supply products to different parts of the world. Taken together, these factors make a strong case for a defence sector mutual fund India, especially for investors with a long-term horizon.

Portfolio Strategy And Key Holdings 

The HDFC Defence Fund is an actively managed thematic fund which has the following composition as on March 31, 2026:

The composition includes both public sector enterprises, such as BEL (Bharat Electronics Limited) and HAL (Hindustan Aeronautics Limited), along with some of the leading private sector companies such as Eicher Motors and Centrum Electronics. All these companies are directly or indirectly involved in the manufacturing and engineering of defence, aerospace, and ancillary products.

Risk Factors Of Sectoral Or Thematic Funds

Even though the fund has performed quite well, growing by 33.33% since inception, there are several factors to consider when investing in the fund.² Any sectoral or thematic fund is dependent on the external conditions and environment, and hence any overall downfall in defence spending by the government can negatively impact the returns. 

The fund may be subject to concentration risk, as even policy changes or implementation delays can negatively affect NAV. In addition, the defence sector is highly sensitive and is heavily influenced by government decisions, making it sensitive to regulatory changes and budgetary priorities.

The overall volatility of the fund would naturally be higher than that of other diversified options. The returns can be quite high when the situations are favourable, but there might be critical underperformance during the bearish market conditions. 

Should You Invest?

There is no specific one-word response to this. You might invest only if it aligns with your investment horizon and risk appetite and falls within your long-term portfolio goals. You should have a strong risk tolerance and must trust the growth story of the robust Indian defence sector to invest in this fund. For any investor looking to invest in the HDFC Defence Fund, it is important to have a long-term perspective. 

However, it may not be suitable for conservative investors or those seeking stable, predictable returns. In such cases, alternatives like PSU bonds or fixed-income instruments can offer exposure to similar macro themes with significantly lower risk. You can explore fixed-income instruments that offer stable returns with lower risk on the Grip Invest platform. For stable net worth growth over the years, portfolio diversification through fixed-income investments, such as bonds, can be a game-changer.

FAQs On HDFC Defence Fund

Author: Grip Invest Editorial Team The Grip Invest Editorial Team is a group of Chartered Accountants, MBA (Finance) graduates, and Qualified Research Analysts dedicated to helping you invest smarter. We dive deep into India's fixed income landscape to deliver content that is accurate, up-to-date, and easy to understand. Whether you're exploring bonds, fixed deposits, or other fixed income opportunities, our guides cut through the noise and give you the clarity to make better financial decisions.

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