A $3 billion fund at Kotak Mahindra Asset Management Co. is backing Indian defense stocks, 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. Industrials and financial stocks make up more than half of his Kotak Large and Midcap Fund, which has beaten 98 per cent of peers in the last five years, according to data compiled by Bloomberg. 

Recent global conflicts will drive further defense investments, he said in an interview last week. Evolving warfare trends, particularly the increasing use of electronic systems, are also driving sustained demand for domestic players, he added.

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

Upadhyaya remains bullish on defense 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 per cent this year versus an 11 per cent 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.

“Financials were available at reasonable valuations even before the fall,” he 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.

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Published on April 16, 2026