Whalesbook
India's Thematic Funds See Explosive Growth Driven by Defence and Manufacturing
The Indian mutual fund market has expanded rapidly over the last two years, with thematic funds gaining significant traction. This surge is largely powered by a record influx of defence orders, an increasing number of domestic manufacturing contracts, and a broadening investment cycle across various economic sectors. As a result, many investors are shifting their focus away from traditional large-cap and flexi-cap categories to explore funds tied to specific, policy-driven themes.
Defence and manufacturing have emerged as two of the most closely watched investment themes. Understanding their unique positioning, portfolio construction by fund managers, and current market data is crucial before selecting an investment.
What are Manufacturing and Defence Mutual Funds?
Manufacturing mutual funds invest in companies that generate a substantial portion of their revenue from industrial production, automobiles, energy, metals, engineering, and consumer durables. These schemes tend to perform well when capacity utilization increases, private capital expenditure picks up, and government production incentive programs create new investment avenues.
Defence mutual funds, on the other hand, focus on listed stocks directly linked to aerospace, defence equipment, shipyards, explosives, communication systems, and precision engineering. The performance of these portfolios is heavily influenced by government indigenisation programs, export orders, and increased defence budgets from friendly nations.
Both these themes carry a very high level of risk. However, they respond to policy triggers in distinct ways. Manufacturing portfolios are generally more cyclical, while defence funds rely significantly on concentrated order flows for their performance.
Top Defence and Manufacturing Funds Compared
This comparison highlights leading funds based on their performance, specifically looking at the one-year CAGR as of December 11, 2025. The featured funds include Motilal Oswal Nifty India Defence Index Fund, HDFC Defence Fund, Navi Nifty India Manufacturing Index Fund, and Baroda BNP Paribas Manufacturing Fund.
Motilal Oswal Nifty India Defence Index Fund – Direct Plan is a passive fund tracking the Nifty India Defence TRI. It holds 18 stocks, has an NAV of ₹9.91, and an AUM of ₹3,892.96 crore, delivering an 8.87% 1-year CAGR. Its portfolio is heavily skewed towards industrials (77.3%) and materials (15.4%), with top holdings including Bharat Electronics and Hindustan Aeronautics.
HDFC Defence Fund – Direct Growth is an actively managed scheme with 23 stocks and an AUM of ₹7,402.96 crore. Its 1-year CAGR is 1.90%, lower than its index peers, partly due to its launch in June 2023. Key holdings also feature Bharat Electronics and Hindustan Aeronautics.
Navi Nifty India Manufacturing Index Fund – Direct Growth tracks the Nifty India Manufacturing Index, with an NAV of approximately ₹18.27 and an AUM of ₹69.77 crore. It boasts a 3-year CAGR of 21.47% and a 1-year CAGR of 4.7%. Its portfolio is diversified across giant, large, and mid-cap stocks, with top holdings like Reliance Industries and Maruti Suzuki.
Baroda BNP Paribas Manufacturing Fund – Direct Growth, an actively managed fund with an AUM of ₹1,031.34 crore, delivered a 1-year CAGR of 5.4%. It offers a diversified sectoral allocation, including healthcare, consumer discretionary, and industrials, with key holdings such as Reliance Industries and Mahindra & Mahindra.
Is it Good to Invest in Defence or Manufacturing Mutual Funds?
Defence and manufacturing funds are influenced by similar policy momentum but behave differently. Defence schemes are concentrated, focusing on a few key companies, with CRISIL expecting 16–18% revenue growth for private defence firms this fiscal due to domestic orders and indigenisation drives.
Manufacturing funds offer broader risk distribution across a larger industrial base. The Production-Linked Incentive (PLI) programme continues to attract new capacity. A Boston Consulting Group study estimates manufacturing's contribution to GDP could rise from 17% to nearly 25% by 2047, driven by sectors like defence, automotive, and electronics.
The Investor’s Takeaway
Defence and manufacturing funds are linked to significant structural economic shifts. Defence funds suit investors comfortable with concentrated portfolios and policy-led order flows, while manufacturing funds offer broader participation in the domestic investment cycle. Both necessitate a multi-year investment horizon due to their high-risk nature. Manufacturing funds may appeal to those seeking stability, while defence funds are for investors willing to tolerate sharper movements for potentially higher gains. Regardless of the theme chosen, disciplined allocation and regular reviews are essential. These funds are sectoral and thematic, making them more sensitive to policy and market cycles than diversified equity funds.
Impact rating: 7/10