Thematic mutual funds have caught the fancy of investors who want to ride on the high-growth, future-focused industries. Currently, two prominent themes capturing investor attention are the Defense sector and the Electric Vehicle (EV) industry.
Both sectors are aligned with the government’s priorities and global megatrends like defence (with the ‘Atmanirbhar Bharat’ mission) and EVs (with the global clean mobility push). In this blog, we will explore which thematic bet is more suitable for long-term investors.
Why Defence Mutual Funds Are Attracting Attention
India ranks fifth in the world in military expenditure, and the government has been aggressively promoting indigenisation of defence manufacturing. With policy reforms, FDI allowances, and increasing defence budgets, defence-oriented companies are witnessing strong order books and profit growth. Key driving forces of defence mutual funds are:
Government Push
Through initiatives such as the Defence Production and Export Promotion Policy (DPEPP 2020) and the “Make in India” initiative, the government is taking proactive steps to reduce reliance on imports and promote private sector participation in domestic production of defence products.
Rising Budgets
The Union Budget for 2025 allocated a budget of ₹6,81,210.27 crore to the defence sector, with a major focus on capital outlay for modernisation and new acquisitions.
Export Opportunities
India’s defence exports reached Rs 23,622 crore in FY2024-25, and the government has set an ambitious target of achieving annual defence exports of Rs 50,000 crore by 2029. This gives Indian defence companies access to world markets and adds another layer of growth to their revenue.
High Entry Barriers
Defence contracts are complicated, long-term, and require high levels of technical expertise and approvals. This creates a strong moat, which makes it difficult for new entrants to compete, while existing companies continue to enjoy sustainable cash flows.
Private Sector Participation
Earlier dominated by public sector undertakings (PSUs), private players such as Bharat Forge, L&T Defence, and Tata Advanced Systems are now playing a bigger role, leading to better innovation and competitiveness in the defence sector.
Why EV Mutual Funds Are Generating Buzz
The EV revolution is one of the biggest global transitions in the mobility sector. In India, with government incentives, charging infrastructure expansion, and reducing battery costs, EV adoption is expected to skyrocket in the next decade. Major drivers of EV mutual funds are:
Policy Support
The FAME-II scheme, along with production-linked incentive (PLI) schemes for advanced chemistry cell (ACC) batteries and auto manufacturing, is aiding in the rapid adoption of EVs. State-level EV subsidies, tax benefits, and the rollout of charging infrastructure are also driving demand.
Demand Growth
India’s EV sales crossed 1 million units in FY25, primarily led by two- and three-wheelers. The government’s 2030 targets for EV penetration ensure long-term structural demand for companies in the EV value chain.
Technology Innovation
Advances in solid-state batteries, hydrogen fuel cells, and charging solutions will further accelerate EV adoption. Companies that invest early in R&D and partnerships with global leaders can gain a first-mover advantage in the EV segment.
Falling Costs
Lithium-ion battery costs have fallen by almost 90% in the past decade, and that decline in cost is expected to continue, making Lithium-ion batteries more affordable for EV manufacturers. Lower costs will make the EV market more competitive with internal combustion engine vehicles, leading to mass adoption of EV vehicles in India.
Which Thematic Option Looks Long Lasting?
Defence Funds could be attractive to investors looking for stability, predictable cash flows, and less volatility. With India’s strategic push towards becoming self-reliant, defence funds offer a compelling opportunity to capitalize on this government-backed demand.
EV Funds are for those investors who have a higher risk tolerance for generating potentially outsized gains. The EV transition is a global and irreversible phenomenon, but it is facing execution hurdles in India, making it a longer-duration, high volatility theme.
Conclusion
Both defence and EV mutual funds offer exciting opportunities, but the choice depends on an investor’s risk appetite and investment horizon. Defence funds offer stability with steady growth prospects, and EV funds are a high-risk, high-reward bet on India’s mobility transformation.
For most long-term investors, a balanced exposure (allocating some portion of investment in both themes to create a diversified portfolio) is the most prudent strategy.
