Indian Equity Fund Outperforms 98% of Peers through Strategic Defence Sector Involvement

Kotak Fund Puts $3 Billion Behind Indian Defence Stocks

A $3 billion fund at Kotak Mahindra Asset Management Co. is wagering that geopolitical tensions will boost local arms production and support the government's efforts to lower reliance on imports. The sector is already benefiting from stronger order pipelines and improving execution visibility, said Harsha Upadhyaya, chief investment officer at the $60 billion money manager.

The Kotak Large and Midcap Fund has beaten 98% of peers in the last five years, according to data compiled by Bloomberg. Industrials and financial stocks make up more than half of the fund's portfolio. Recent global conflicts will drive further defence investments, Upadhyaya said. Evolving warfare trends, particularly the increasing use of electronic systems, are also driving sustained demand for domestic players.

Indian defence firms have rallied in recent years on the back of policy support to boost domestic production and the government's focus on local procurement and capability building. Upadhyaya said the geopolitical environment will likely accelerate that shift, strengthening the long-term investment case for the sector. The fund added radar maker Astra Microwave Products Ltd. in March, the worst month for Indian equities since the pandemic. It also counts state-run peer Bharat Electronics Ltd. as a top holding.

A defence sector measure representing companies from aerospace to missile makers has delivered more than 50% average returns over the last three years, outperforming most sectoral gauges in India.

| Sector Measure | Returns Over 3 Years | | --- | --- | | Defence Sector | 50%+ | | Industrials Sector | 25-30% | | Financial Sector | 20-25% |

Upadhyaya remains bullish on defence but has kept portfolios diversified in amid volatility, staying fully invested while selectively adding to preferred sectors. Indian stocks have underperformed their regional peers since the start of 2025, mainly due to worries over slowing earnings growth while geopolitical challenges, including the Iran war, continues to hurt outlook. MSCI Inc.'s gauge of Indian shares is down more than 5% this year versus an 11% advance in its Asian measure.

Financial stocks also look attractive after the recent market drop, he said. The sector has come under pressure since early March, dragged by the central bank's tighter currency trading rules and a sharp selloff in India's biggest private-sector lender HDFC Bank Ltd. Still, steady credit growth and a stabilizing interest-rate outlook should aid shares, Upadhyaya said. Recent additions in this space include beaten-down private lender IndusInd Bank Ltd., along with shadow lenders Shriram Finance Ltd. and Bajaj Finance Ltd., Bloomberg-compiled data show.