Highlights

  • Understand how defence ETFs track India’s growing defence sector through the Nifty India Defence Index.
  • Learn about tax treatment: short-term gains are taxed at 20%, long-term gains at 12.5%, with exemptions.
  • Compare available defence ETFs in India, including expense ratios, AUM, and key features.
  • Discover the benefits of diversification, liquidity, and lower costs compared to individual stock picking.

India’s defence sector in FY 2026–27 is marked by a historic allocation of ₹7.85 lakh crore, backed by ambitious indigenisation goals. This growth has made defence sector investments increasingly attractive. But picking individual defence stocks requires deep sector knowledge and carries concentration risk.

Defence ETFs offer a simpler alternative: instant exposure to multiple defence companies through a single investment. Here’s everything you need to know about defence ETFs in India.

What is a Defence ETF?

A defence ETF (Exchange Traded Fund) is a fund that tracks a Defence Index. When you buy ETF units, you purchase a portfolio that mirrors the index’s performance.

ETFs trade like common stocks on stock exchanges, giving you real-time pricing and instant liquidity. Defence ETFs specifically invest in companies deriving significant revenue from India’s defence sector.

Index Composition: These funds track either of the Defence Indices, which reflect the performance of a portfolio representing companies associated with India’s defence sector. Listed stocks that belong to eligible defence-related industries or derive at least 10% of their revenue from the defence sector are considered for inclusion. Eligible stocks are selected based on their six-month average free-float market capitalisation, and their index weights are assigned accordingly based on free-float market capitalisation

Benefits of Investing in Defence ETFs

Lower Costs: ETFs generally have lower fees than actively managed mutual funds. Defence ETFs currently charge expense ratios between 0.41-0.43% annually, significantly cheaper than most equity mutual funds.

High Liquidity: Buy or sell anytime during market hours at real-time prices – no waiting for end-of-day NAV settlements like traditional mutual funds.

Transparent Holdings: ETF portfolios mirror the index exactly, so you always know which companies you’re invested in.

How to Invest in Defence ETFs

Investing in defence ETFs requires a demat account and a trading account with a stockbroker. Here’s the process:

  1. Open a demat account with any SEBI-registered broker if you don’t have one.
  2. Complete KYC verification as per regulatory requirements.
  3. Search for defence ETF symbols on your broker’s trading platform.
  4. Place a buy order just like purchasing shares – specify quantity and price.
  5. Hold units in demat form with no physical certificates.

Many brokers now offer SIP (Systematic Investment Plan) facilities for ETFs, allowing monthly investments starting from ₹500.

Taxation of Defence ETFs

Defence ETFs follow equity taxation rules for FY 2026-27:

Holding PeriodTax RateNotes
Less than 12 months20%Short-term capital gains
More than 12 months12.5%Long-term capital gains

Important: Long-term gains enjoy a ₹1.25 lakh exemption per financial year across all equity assets. Gains below this threshold are tax-free.

Key Considerations for Defence ETF Investors

Defence ETFs are thematic investments carrying concentration risk. Performance depends heavily on government defence budgets and policy shifts. Consider them as part of a diversified portfolio rather than your sole investment.

These ETFs suit investors with a higher risk appetite and conviction in India’s long-term defence sector growth. The sector’s dependence on government spending means returns can be volatile.

FAQs

1. What is the minimum investment in defence ETFs?

Defence ETFs trade like stocks, so the minimum is one unit. Unlike mutual funds, there’s no minimum investment requirement.

2. How are defence ETFs different from defence mutual funds?

ETFs trade on exchanges in real-time during market hours, while mutual funds settle at the end-of-day NAV. ETFs require a demat account; mutual funds don’t.

3. Which companies are included in defence ETFs?

Defence ETFs hold stocks from the Nifty India Defence Index, including Bharat Electronics, Hindustan Aeronautics, Solar Industries, Mazagon Dock, and other companies earning significant revenue from defence activities.

4. Are defence ETFs suitable for long-term investment?

Defence ETFs are sectoral investments with concentration risk. They suit investors with higher risk tolerance and a long-term belief in the defence sector growth. Include them as part of a diversified portfolio, not as your only investment.