Defence and Infrastructure Funds for NRIs: What the Returns Hide and Where They Belong in a Portfolio

In May 2023, the Mirae Asset Defence Fund, one of the first pure-play defence sectoral funds to list in India, delivered a one-year return above 100 percent. By late 2024, the same fund had pulled back more than 35 percent from its peak, as valuations that had stretched past 60 times earnings met the reality that government orders, though large, move slowly and not always to schedule. The underlying policy story, the government's stated goal of 75 percent defence indigenisation by 2027, the Production-Linked Incentive scheme for defence manufacturing, the Rs 10.86 lakh crore infrastructure allocation in the Union Budget 2025-26, remains intact and real. The mistake was not the theme. The mistake was treating a cyclical, concentrated sector fund like a core holding and buying it after the run, not before.

This is the part the fund-house marketing skips: government policy creates a genuine investable tailwind, but it does not remove concentration risk, it does not compress volatility, and it does not prevent valuation-driven corrections that can be sharper than anything a broad Nifty 50 fund delivers. For an NRI reading about India's defence boom or the infrastructure supercycle and wondering whether to allocate, the honest guide starts here.

The 30-second answer: Defence and infrastructure thematic funds give exposure to India's genuine policy push on indigenisation, PLI schemes, and record capital expenditure. The major funds include Mirae Asset Defence Fund, SBI Infrastructure Fund, HDFC Infrastructure Fund, and UTI Transportation and Logistics Fund. SEBI requires at least 80% of assets in the stated theme, which means meaningful concentration risk. Defence funds delivered roughly 3x gains between 2021 and late 2023, then corrected 30 to 40 percent as valuations overshot. Infrastructure funds are more diversified but still cyclical. Most non-US, non-Canada NRIs can invest through NRE or NRO accounts; US and Canada NRIs face FATCA onboarding friction and PFIC tax treatment. Gains are taxed at 12.5% LTCG above Rs 1.25 lakh after 12 months, with TDS at redemption. The right portfolio role is satellite, capped at 5 to 10 percent of equity allocation.

This guide is for NRIs who already have a working understanding of Indian equity mutual funds and are now evaluating whether defence and infrastructure thematic funds belong in their portfolio. If you are still working out the basics of how to invest in Indian funds from abroad, start with the NRI mutual fund eligibility guide. What follows covers the policy context, the major funds and their return histories, the concentration risk that most marketing glosses over, the NRI eligibility position, how gains are taxed, and the right way to size this if you decide to invest.

The policy backdrop: real, but already partly in the price

Start with the numbers because they are genuinely large. The Union Budget 2025-26 allocated Rs 10.86 lakh crore to capital expenditure, roughly 3.4 percent of GDP, making this the sixth consecutive year of double-digit capex growth. Within that, defence capital outlay was set at Rs 1.80 lakh crore, with the Ministry of Defence maintaining its target of 75 percent domestically sourced procurement by 2027 under the Atmanirbhar Bharat push. The PLI scheme for defence manufacturing was extended with fresh allocations to draw private sector entry. Roads, railways, ports, metro rail, and the Sagarmala and Bharatmala programmes each carry multi-year spending pipelines that are not budget-cycle dependent in the way that social schemes are.

None of that is marketing copy: the orders exist, the capex exists, and the listed beneficiaries are genuine. The problem is that markets are forward-looking, and a large part of this pipeline was priced into stocks from 2021 to 2023, well ahead of the physical delivery of either orders or earnings. When the earnings and order timelines slipped, the stocks corrected because the valuations could not sustain themselves on hope alone. The tailwind behind defence and infrastructure is a three-to-five-year story at minimum. If you are reading this in 2026 and considering an investment, the question is not whether the tailwind is real. It is whether you are buying it at a price that leaves enough return for the holding period you can actually sustain.

How thematic funds are structured: the SEBI 80% rule and what it implies

SEBI's circular on categorisation and rationalisation of mutual fund schemes requires sectoral and thematic funds to invest at least 80 percent of net assets in the stated sector or theme. The remaining 20 percent can hold cash, liquid instruments, or adjacent names, but the fund manager has no discretion to rotate out of the theme even when valuations are extreme. This is the single structural feature that makes thematic funds fundamentally different from a flexi-cap or multi-asset fund.

In a defence fund, the 80 percent rule pins the manager to a listed defence universe that, in India, is small in absolute terms. As of early 2026, the Nifty India Defence Index contains roughly 15 to 17 stocks, with the top five names (Hindustan Aeronautics Limited, Bharat Electronics, Bharat Dynamics, Cochin Shipyard, and Garden Reach Shipbuilders and Engineers) typically comprising 50 to 60 percent of the index weight. A fund that must be 80 percent in this universe is not merely concentrated by choice; it is concentrated by regulation. When the whole universe re-rates downward, the fund has no meaningful escape.

Infrastructure funds have more breathing room. The SEBI thematic label covers power generation and transmission, roads and highways, ports, airports, construction companies, logistics and warehousing, and adjacent industrials. That universe is large enough that SBI Infrastructure Fund and HDFC Infrastructure Fund each hold 40 to 60 stocks with more manageable single-name concentration. But the thematic constraint still binds: infrastructure is a cyclical sector, and when the cycle turns or when valuations across infrastructure names collectively stretch, the fund cannot reduce the theme.

The implication for an NRI is simple but worth saying explicitly. If you buy a thematic fund, you are buying the theme, not the manager's view on the best risk-adjusted equities available. The manager cannot protect you from sector-level repricing by moving the book. You assume that risk entirely.

The major funds: what they hold and what the return history actually says

Mirae Asset Defence Fund

Launched in May 2023, Mirae Asset Defence Fund tracks the defence and aerospace theme. Its portfolio is anchored in HAL, BEL, Bharat Dynamics, Data Patterns, Paras Defence, and MTAR Technologies, with tactical positions in defence electronics and component suppliers. The fund rode the order-flow euphoria of 2023 to deliver returns that looked extraordinary in a 12-month window, briefly exceeding 100 percent. From the September 2023 peak to the trough in mid-2024, the fund lost roughly 35 to 40 percent of its value, which is where a new investor who entered in late 2023 on the performance headline would have found themselves.

As of Q1 2026, with valuations having partially normalised, the three-year return from inception is strong on an annualised basis but masks the ride: a near-tripling from the launch lows, a deep correction, and a partial recovery. The fund's expense ratio in the direct plan runs around 0.6 to 0.7 percent, modest for a thematic fund. The AUM has grown substantially on the back of retail investor interest, which creates its own problem: a larger fund buying the same small universe of defence stocks pushes prices up on the way in and can depress them on the way out, the liquidity risk that becomes real when a large sectoral AUM tries to exit.

SBI Infrastructure Fund

One of the older infrastructure funds in India, SBI Infrastructure Fund carries a return history long enough to show multiple cycles. Its 10-year return as of early 2026 is broadly in line with the Nifty 500 on an annualised basis, but with higher drawdowns and a longer recovery period after the 2018 to 2020 infrastructure slump. The portfolio is diversified across capital goods, power, roads, construction, and logistics. The fund's size gives it better liquidity than a pure-play defence fund, and its broader mandate means single-stock risk is more diluted.

The 3-year return from 2023 to 2026, a period benefiting from the capex supercycle and the government's infrastructure push, looks good in absolute terms. Against the Nifty 50, the comparison is less clean: the Nifty 50's 3-year annualised return over the same period was roughly 14 to 16 percent, and large-cap infrastructure companies outperformed, but the mid-cap and small-cap weights inside SBI Infrastructure carried more volatility and temporarily worse drawdowns.

HDFC Infrastructure Fund

HDFC Infrastructure Fund has a longer track record than most thematic peers, covering the 2007 to 2013 infrastructure boom and the subsequent decade-long underperformance. That history is instructive: the fund's 10-year return from 2011 to 2021 lagged a simple Nifty 50 index fund by a wide margin, because the infrastructure theme was out of favour for most of that decade. The current revival looks strong in a 3 to 5-year window, but the prior decade is a useful reminder that thematic tailwinds can pause for far longer than most investors plan for.

The portfolio mix emphasises construction, power, and transport, with meaningful weight in companies that build rather than those that operate, giving it more earnings cyclicality than an infrastructure operator fund would carry.

UTI Transportation and Logistics Fund

Slightly different in mandate, UTI Transportation and Logistics Fund covers roads, ports, logistics providers, aviation, and related infrastructure operators. Its inclusion here is because transport infrastructure is one of the largest sub-themes within the government's capex programme, and several NRIs familiar with India's logistics transformation (the Dedicated Freight Corridor, the National Logistics Policy) have specifically asked about it. The fund's concentration is moderate, and the logistics and warehousing names it holds benefit from a separate set of tailwinds including GST simplification and the shift from unorganised to organised warehousing.

Returns over three years have been solid, roughly in line with mid-cap indices, with the usual caveat that the comparable period coincided with an overall equity bull run. The fund is less correlated to defence-budget headlines than the other three and behaves more like a broad infrastructure play than a policy-cycle play.

Concentration risk: why three times up does not mean three times in the right direction

Here is the dynamic that matters most for an NRI deciding how much to allocate. From the 2021 lows to the September to October 2023 peak, defence-linked stocks in India collectively rose between 200 and 400 percent depending on the specific company. The narrative was clear: the government had committed to indigenisation, the defence budget was rising, and order books at HAL and BEL were filling up. All of that was factually accurate.

What happened next was a textbook valuation correction. The stocks had re-rated from 15 to 20 times earnings to 60 to 80 times earnings. At those multiples, the future growth was not just being priced in; it was being over-priced relative to the pace at which defence orders actually translate to revenues and then to profits. HAL, for example, has a supply chain, training requirements, and component import dependencies that mean an order book does not become earnings in a straight line. When quarterly earnings in late 2023 and early 2024 showed the mismatch between order intake and revenue recognition, the stocks fell sharply. A fund that had risen three times in two years lost 30 to 40 percent in six months.

That pattern is not unique to defence. Infrastructure stocks went through an identical cycle from 2007 to 2008, then spent the better part of a decade below their peak. The policy driver was real in 2007 too. The problem was the price at which the driver was purchased.

For an NRI evaluating this in 2026, the relevant questions are: where in the valuation cycle are these names now, and how long can you genuinely hold through the next correction? On the first point, as of Q1 2026, defence fund P/E multiples have compressed from their 2023 peaks but remain elevated relative to their own 10-year averages. The correction happened, but the sector is not cheap by most metrics. On the second, NRIs often have holding periods constrained by life events (returning to India, funding a child's education abroad, remitting for property), and the illusion of patience is worse than admitting you cannot hold through a 40 percent drawdown.

NRI eligibility: the country you live in decides more than the fund rules

The fund-house prospectus for each of these schemes says NRIs can invest. What it does not say is that the practical door depends heavily on where you live.

UK, UAE, Singapore, Australia and most other countries: no special restriction. You invest through mutual fund KYC, with NRE funding for repatriable proceeds and NRO for India-sourced money. Thematic funds carry no extra eligibility condition beyond the standard NRI onboarding requirements. FATCA and CRS self-certification apply, but these countries' NRIs move through the process without the additional friction faced by US and Canada residents.

US and Canada residents: two layers of friction. First, onboarding. Most Indian AMCs, including some of those managing the funds listed above, either decline US and Canada NRI subscriptions outright or accept them only through offline, paper-based processes that require in-person attestation or a power of attorney. SBI Mutual Fund and a few others explicitly decline US persons; HDFC AMC accepts them in select schemes under a paper-based process. Check your specific AMC's policy before starting the KYC. Second, and more important, US persons face PFIC (Passive Foreign Investment Company) treatment on any Indian mutual fund under IRC Section 1297. Every Indian equity fund, including defence and infrastructure thematic funds, meets the PFIC definition because it is a foreign pooled vehicle earning passive investment income. Without the QEF election (which Indian AMCs do not support because they produce no annual PFIC information statement), a US person is left with the default excess-distribution method, which taxes gains at the highest ordinary rate with compounded interest, or mark-to-market. The punitive effect typically exceeds any India-side return advantage, and Form 8621 must be filed annually for each fund. For a US tax resident, Indian thematic mutual funds are usually the wrong vehicle regardless of the underlying theme's merits.

Canada residents face fewer formal restrictions than US persons but should verify onboarding with the specific AMC. The Canadian foreign investment reporting regime (T1135) applies for holdings above CAD 1,00,000 in total foreign property.

The NRI eligibility landscape for all Indian mutual funds is covered in detail in the NRI mutual funds eligibility guide.

Tax on gains: equity rules apply, with TDS at redemption

Defence and infrastructure funds are classified as equity-oriented funds under the Income Tax Act, because they invest primarily in Indian equities. The tax treatment follows equity capital-gains rules in full, and the 2024 Budget changes apply to all transfers on or after July 23, 2024.

Long-term capital gains (held over 12 months): taxed at 12.5% on the portion of total equity LTCG above Rs 1.25 lakh in a financial year. No indexation. No distinction between sectoral and diversified equity funds; both face the same rate.

Short-term capital gains (held 12 months or less): taxed at 20% flat.

The key NRI-specific point is TDS at source. When you redeem, the fund house deducts tax on the gain before releasing proceeds to your NRE or NRO account. For equity funds, the TDS rate on LTCG for NRIs is 12.5% (plus applicable surcharge and cess), and on STCG is 20% (plus surcharge and cess). The TDS is deducted on the net gain portion of the redemption, not on the entire proceeds. You then file an Indian return and reconcile the TDS against your actual tax liability; if TDS exceeds liability you receive a refund.

A worked example makes the arithmetic concrete. Rajan, an NRI based in Dubai, invested Rs 5,00,000 in SBI Infrastructure Fund's direct plan in January 2025 through his NRE account. He redeems in February 2026, 13 months later, at a value of Rs 6,30,000, a gain of Rs 1,30,000. The holding period exceeds 12 months so the gain is long-term. His only other equity LTCG that year is Rs 20,000 from a listed share sale. Total equity LTCG: Rs 1,50,000, of which Rs 1,25,000 is exempt. Taxable LTCG: Rs 25,000. Tax at 12.5%: Rs 3,125, plus 4% cess of Rs 125, total Rs 3,250. The fund house will have withheld TDS on the Rs 1,30,000 gain at 12.5% before the annual threshold deduction (TDS does not account for your other fund transactions across the year). TDS withheld: roughly Rs 16,250 plus cess. Rajan files his Indian return, claims the Rs 1,25,000 exemption, and receives a refund of the excess TDS. The process is covered in TDS for NRIs and how to claim refunds.

Now contrast with a short-term exit. Priya, also in Dubai, puts Rs 3,00,000 into Mirae Asset Defence Fund in August 2025, concerned she might want the money back quickly. She redeems in December 2025, four months later, at Rs 3,36,000, a gain of Rs 36,000. Short-term: taxed at 20%, so Rs 7,200 plus cess. TDS deducted at source at 20% on the gain. No exemption threshold applies. If she had simply held to August 2026, the Rs 36,000 gain would have shifted to the long-term bucket, with the Rs 1.25 lakh exemption reducing tax on this gain alone to zero (assuming no other equity gains above the threshold in that year). The 12-month boundary costs or saves real money; know your intended horizon before you invest. See also capital gains tax for NRIs on shares and mutual funds and the broader framework in tax-efficient investing for NRIs.

The right portfolio role: satellite, not core

The most common mistake with thematic funds is not picking the wrong theme. It is putting too much money into it. This matters more for NRIs than for resident investors for a few reasons: NRIs often have fewer rupee income streams to absorb a drawdown, their portfolio may have significant dollar, pound, or dirham allocation that already carries currency risk, and a 40 percent drawdown in a thematic fund hits harder when you cannot easily add more from abroad to average down.

The standard portfolio construction principle is to treat thematic and sectoral funds as satellite holdings, comprising 5 to 10 percent of total equity allocation at most. For an NRI with a total India equity portfolio of Rs 30 lakh, that cap implies Rs 1.5 to 3 lakh in all thematic positions combined. It does not mean Rs 3 lakh each in a defence fund and an infrastructure fund.

The reasoning behind the cap is that your core portfolio should deliver participation in India's broad equity growth without being contingent on any single sector performing. A combination of an index fund and a flexi-cap or large-cap active fund does that. The defence or infrastructure fund sits on top, adds thematic exposure during the upswing, and does not derail the portfolio if the theme underperforms for three to five years, as infrastructure did from 2011 to 2021.

If you are within five years of a major financial goal (a child's university fees abroad, a property purchase in India, or a planned return home with a specific corpus target), the satellite allocation for thematic funds should be near zero. You cannot afford the drawdown risk that a concentrated thematic position implies, and you probably cannot hold through the next correction even if you intend to. The NRI portfolio asset allocation guide covers the core-satellite framework in full, and building an India corpus as an NRI addresses the goal-based sizing question directly.

Comparing against passive alternatives

Defence and infrastructure funds are active, concentrated, and expensive relative to a passive index fund. Before committing to them, understand what you are giving up. The Nifty 50's 3-year annualised return from 2023 to 2026 sits in the 14 to 16 percent range; the same money in a low-cost Nifty 50 index fund with an expense ratio of 0.10 to 0.15 percent kept almost all of that. Infrastructure funds with expense ratios of 1.5 to 2 percent (regular plans) or 0.8 to 1 percent (direct plans) need to outperform the Nifty 50 by that margin just to break even on cost. Whether they consistently do depends on the cycle: in a capex upcycle they can, in a sideways or infrastructure-down cycle they usually do not.

The case for an active thematic fund is not that it reliably beats the index. It is that you specifically want concentrated exposure to this theme at this point in the policy cycle, with full understanding of the concentration risk and volatility. That is a legitimate position. It is just a different position than "the 3-year return looks good." If you want broad India equity with low cost and no concentration risk, an index fund is the better answer. The comparison is detailed in NRI passive vs active funds in India and NRI investing in index funds and ETFs.

Direct plan versus regular plan: the cost that compounds silently

Thematic fund investors are often reached through relationship managers and distributors who have a direct commercial interest in the regular plan. The regular plan carries a distributor commission embedded in the expense ratio, typically 0.5 to 1 percent higher annually than the direct plan of the same fund. On a thematic fund with a higher expense ratio to begin with, the difference compounds significantly over five to ten years. If you are investing through your Indian bank's relationship manager, you are almost certainly in the regular plan; check the scheme name, which will say "Direct" or "Regular" explicitly. The arithmetic over a ten-year holding period is covered in NRI direct vs regular plan mutual funds.

Rebalancing: when to trim and when to hold

If you enter a defence or infrastructure fund as a 5 to 7 percent satellite allocation and the theme runs hard (as defence did in 2022 to 2023), that position can grow to 15 or 20 percent of your equity portfolio without you doing anything. At that point the satellite has become a core position by default, and you carry concentration risk you never intended.

The discipline is to rebalance annually or whenever a thematic position breaches its target ceiling, not because the theme is over but because position sizing relative to your whole portfolio is the variable you are managing. If the defence position has run to 12 percent of equity, trim it back to 7 percent and redeploy into your core. You will incur LTCG tax on the trimmed portion, but that is a feature of good portfolio management, not a problem to avoid. Two hidden costs are also worth watching before any redemption: most thematic funds charge an exit load of 1 percent for redemptions within 12 months, and higher portfolio churn inside active thematic funds raises internal transaction costs that the headline expense ratio does not always fully capture. The full cost picture is at NRI hidden costs in Indian funds, the rebalancing framework at NRI tax-aware portfolio rebalancing, and the annual review process at NRI annual portfolio review checklist.

The closing read

The government's push on defence indigenisation and infrastructure spending is real, large, and multi-year. The Rs 10.86 lakh crore capex budget, the PLI defence schemes, the 75 percent indigenisation target: these are funded programmes with named beneficiaries in the listed universe.

What is also real is that markets already know this. Defence stocks tripled before the earnings arrived to justify those prices, corrected sharply, and now trade at multiples that are elevated but not unreasonable. Infrastructure funds have a longer history that includes a decade of underperformance between their 2008 peak and their 2021 revival. Themes that everyone knows about are usually already partly priced.

Buy these funds, if you buy them, as satellite positions sized at 5 to 10 percent of your equity allocation, in the direct plan, after you have built the core portfolio, with a genuine horizon of at least five years and the emotional capacity to hold through a 30 to 40 percent drawdown. Non-US, non-Canada NRIs have no eligibility obstacle; invest from your NRE account, hold past 12 months for the 12.5% LTCG rate, and account for TDS at redemption. US residents should take PFIC advice before buying any Indian fund, thematic or otherwise.

The defence and infrastructure themes will almost certainly produce positive returns over a decade that coincides with India's capex cycle. The question is whether you are buying them at the right price, sizing them appropriately, and holding them for long enough. Most retail investors, including NRIs chasing the 2023 headlines, got at least one of those three things wrong. Get all three right and thematic funds earn their satellite role. Get any one wrong and a Nifty 50 index fund with a tenth of the expense ratio and no concentration anxiety would have served you better.

Related guides

• NRI mutual funds eligibility: who can invest and how
• NRI passive vs active funds in India
• NRI investing in index funds and ETFs
• Tax-efficient investing for NRIs
• NRI portfolio asset allocation
• NRI tax-aware portfolio rebalancing
• NRI hidden costs in Indian funds
• NRI mutual fund TDS at redemption
• Building an India corpus as an NRI
• NRI annual portfolio review checklist
• Capital gains tax for NRIs on shares and mutual funds
• TDS for NRIs and how to claim refunds
• REITs and InvITs for NRIs
• NRI direct vs regular plan mutual funds

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This guide is general information for NRIs evaluating defence and infrastructure thematic mutual funds, and reflects rules and fund data current as of May 2026. Capital-gains tax rates (12.5% LTCG, 20% STCG) apply to transfers on or after July 23, 2024, and may change. Fund-house onboarding policies for US and Canada NRIs, FATCA obligations, and US PFIC treatment of Indian mutual funds are specialist areas that can change and differ by institution. Return figures cited are approximate historical illustrations, not guarantees of future performance. Thematic fund allocations discussed here are illustrative, not personalised investment advice. Your appropriate allocation depends on your income, goals, tax residency, risk capacity, and financial position. Confirm current fund eligibility, costs, and tax treatment with a SEBI-registered investment adviser and a qualified cross-border tax professional before investing.