India Defense Stocks Surge: Funds Capitalize on Budget Boost & Policy Shift
Overview
India's defense sector is transforming from a policy discussion into a measurable investment opportunity. Fueled by significant budget allocations and a surge in domestic procurement, defense and aerospace companies are experiencing sharp order inflows. Asset managers are launching specialized mutual funds, offering investors a way to participate in this strategic manufacturing push and the sector's outsized market returns.
Stocks Mentioned
Defense Sector's Strategic Shift
India's defense sector is experiencing a significant transformation, evolving from a mere policy narrative into a concrete investment theme. The Union Budget 2025 earmarked over ₹6.81 trillion for defense, signaling robust government commitment. Expectations are high for further increases in defense spending in the upcoming budget, driven by escalating global tensions.
This strategic push is underscored by a dramatic rise in domestic procurement, now accounting for approximately 75% of defense capital purchases, a substantial jump from less than 60% five years ago. Consequently, listed defense and aerospace companies are witnessing a sharp expansion in order inflows, further bolstered by ambitious export targets of ₹500 billion by FY30, up from ₹236.2 billion in FY25.
Key Funds Under Scrutiny
This structural shift in the defense industry has resonated strongly within equity markets, where defense-linked stocks have delivered exceptional returns over the past three years. To harness this momentum, asset managers have introduced defense-themed mutual funds, providing a diversified avenue for investors keen on participating in India's long-term strategic manufacturing agenda.
Invesco India PSU Equity Fund
Launched in January 2013, the Invesco India PSU Equity Fund is a decade-old scheme that focuses on companies with significant government shareholding or control. As of December 31, it managed an Asset Under Management (AUM) of ₹14.49 billion. The fund's expense ratio (direct plan) stands at 0.9%, which is considered somewhat high but typical for thematic funds. Approximately 98.3% of its portfolio is invested in equities.
Sectorally, Banks represent 20.68%, followed by Aerospace and Defence at 18.72%, Power (15.45%), Petroleum Products (10.47%), and Finance (5.9%). The fund's top 10 holdings, including SBI (9.41%) and Bharat Electronics (8.27%), constitute 61.1% of the portfolio. This fund is not a pure defense play but holds a significant allocation to the aerospace and defense theme. It has delivered a compounded annual growth rate (CAGR) of 17.87% over 10 years, significantly outperforming its benchmark, the BSE PSU Total Return Index (TRI), which posted a 3.44% CAGR during the same period.
