Whalesbook
Defence Sector's New Frontier
Mirae Asset Investment Managers has introduced two new investment vehicles, the Mirae Asset BSE India Defence ETF and a Fund of Fund (FoF), designed to mirror the performance of the BSE India Defence Total Return Index. This move taps into India's burgeoning defence manufacturing ecosystem, which has seen annual production reach a record ₹1.50 lakh crore in FY25. The index itself is structured to provide diversified exposure, moving beyond traditional Public Sector Undertakings (PSUs) to include key system integrators and technology enablers crucial for the nation's 'Atmanirbhar Bharat' initiative. The strategy behind this index composition aims to mitigate single-ownership risk while covering a broad spectrum of defence capabilities, from platforms to ammunition and systems integration.
Navigating High-Risk, High-Reward Terrain
The launch comes at a time when India's defence sector is experiencing significant tailwinds. Geopolitical tensions have amplified defence spending globally, and India is no exception. The Union Budget for FY26 envisages an outlay of ₹6.81 lakh crore, a 9.5% increase, reflecting a sustained push for modernization and indigenous production. Defence exports have also surged, reaching ₹23,622 crore in FY25, underscoring India's growing capabilities. However, this growth trajectory is accompanied by considerable risk. The BSE India Defence Index, as of September 2025, reported a P/E ratio of 47.92 and a P/B ratio of 10.63, while the Nifty India Defence Index shows a P/E of 51.77. This is higher than the historical sector average P/E of 51, and after recent rallies averaging 80-100% between April and July 2025, average sector P/E multiples have reached approximately 70, prompting valuation caution among analysts. The funds themselves carry a 'very high risk' designation, a critical factor for investors to consider, especially given the long gestation periods for defence projects and dependence on government contracts.
Market Context and Outlook
The Mirae Asset BSE India Defence ETF and FoF will open for subscription on February 2, 2026. This launch enters a competitive space with existing players like the Motilal Oswal Nifty India Defence ETF, which has an Assets Under Management (AUM) of ₹1,028 crore and an expense ratio of 0.41%. The broader Indian equity market, represented by the BSE Sensex and Nifty 50, shows signs of consolidation and caution ahead of the Union Budget 2026, with key indices trading around 82,566 and 25,418 points respectively on January 29, 2026. Despite potential sector-specific volatility and current high valuations, analysts project the Indian defence sector to grow at a CAGR of around 20% through FY29. The focus on indigenization and increasing government allocations, coupled with a more complex geopolitical environment, suggests continued long-term demand, though investors must remain cognizant of the inherent risks and the need for a long investment horizon, with diversified equity funds often being recommended over narrowly focused thematic investments.