The defence sector in India continues to show promise, with experts acknowledging that while it has generated substantial returns in recent years, investors now need to adopt a more selective approach. During Moneycontrol’s Mutual Fund Summit 2025 in Bengaluru, industry leaders emphasized that the initial exuberance surrounding the defence theme may have peaked, yet the structural tailwinds supporting the sector remain robust. Deepak Shenoy, CEO of Capitalmind AMC, highlighted that although much of the value has been uncovered, the long-term opportunity in India’s manufacturing landscape is only beginning to unfold. He stressed that the current phase should not be misconstrued as a downturn, as the strong defence order pipeline and increasing capital expenditure signal sustained growth.

Harsha Upadhyaya, CIO at Kotak Mahindra AMC, remarked that the perception of defence manufacturing has evolved from skepticism to confidence. Years of viewing the sector as uncertain or overly reliant on government contracts have shifted, thanks to clearer visibility on orders and the emergence of credible private players. He noted that while valuations have increased, the earnings potential of these companies has only just begun to catch up. Improved balance sheets and real cash flows are now evident, showcasing the sector's transformation from mere narratives to tangible revenue generation.

Despite the optimism, caution is advised. Anish Tawakley, Co-CIO (Equity) at ICICI Prudential AMC, warned that the defence sector has become a consensus trade, which could pose risks for investors. He cautioned against assuming that all defence stocks will thrive, especially smaller firms that may lack sustainable business models. The consensus among the fund managers is clear: while the defence sector is integral to India's long-term industrial and export objectives, investors should remain grounded and focus on company fundamentals rather than chasing momentum. Shenoy encapsulated this sentiment by stating that the theme still possesses potential, but success will come from identifying companies capable of delivering over the long term, rather than short-lived quarterly gains.