It’s well-known that certain sectors of the market respond strongly to geopolitical tensions. In 2003, the Iraq war sent defence and energy stocks soaring as investors anticipated increased military spending and volatile oil prices. Fast-forward to February 2026 and a similar pattern emerged, as pre‑conflict optimism drove inflows into the defence and oil & gas sectors. While the dynamics aren’t identical, the market’s responsiveness to geopolitical developments remains unchanged.
According to the NSE website, the Nifty India Defence Index experienced sharp swings over the past six months, rallying toward 8,300 points in November 2025 before correcting to around 7,214 by 30 March. Following the outbreak of war on 28 February, the index saw renewed investor interest, with episodic spikes of 2-3% in single sessions as defence stocks attracted focused buying amid expectations of higher sectoral spending.
In contrast, the Nifty Oil & Gas Index remained steadier, trading mostly between 10,000 and 11,500 and closing March around 10,788. Despite crude price volatility and geopolitical pressures, it delivered a modest one‑year return of around 2.2%, underscoring resilience without dramatic surges.
Market chatter on big bets have put these sectors firmly in the spotlight, but understanding how they have performed and how volatile they are is crucial for investors.
Intermittent gains, immediate corrections
Movements in the defence and energy sectors have been anything but linear. Prashant Mishra, founder and CEO, Agnam Advisors, said, “Defence stocks saw an immediate sentiment-driven rally at the start of March as geopolitical tensions escalated, with another sharp spike around 6-7 March and a more pronounced move near 17 March, when the sector rose nearly 7%.” To put this into perspective, the Nifty India Defence Index returned 13.9% over the past year (1 April 2025 to 1 April 2026) excluding dividends, interests, and coupon payments.
However, this hasn’t been a sustained trend. The pattern through the month has been one of intermittent spikes followed by corrections, highlighting volatility rather than strength. Importantly, the rally is not broad-based—only select stocks have participated. Much of the buying is driven by anticipation of higher defence spending, but there is no concrete data yet to support a structural or long-term uptrend.
Meanwhile, the Nifty Energy Index witnessed volatile, event-driven movements during the period. Rising Middle East tensions briefly pushed crude oil prices above $119 a barrel in early March. The index had touched a peak of 37,181.8 on 26 February, but during March it traded in a relatively narrow range of about 34,800–36,800. It failed to sustain higher levels, reflecting broader market weakness and profit-booking after the late-February highs.
Rather than a sharp one-way rally, this index has also seen intermittent spikes and corrections. Despite geopolitical tailwinds, the one-year return remains in the low-to-mid teens, reflecting the cyclical and volatile nature of the energy sector.
Avoid temptation
While the temptation to chase sectoral opportunities via mutual funds is strong, investors are better served by maintaining a diversified core portfolio. “The core portfolio must remain intact, with around 80% in diversified long-term allocations, while a small portion can be used to selectively participate in two to three opportunities,” said Nehal Mota, co-founder & CEO, Finnovate, a Sebi-registered investment advisory firm.
Gaurav Santoshwar, a strategic debt advisor in Mumbai, follows a disciplined core-satellite strategy, keeping most investments in diversified mutual funds while allocating 5-10% tactically to defence or oil amid possible war-led rallies. He invests via flexible SIP-like lump sums of ₹75,000-1,25,000 across select funds, rotating allocations based on market conditions, aiming to capture short-term opportunities without disturbing long-term portfolio stability.
Perfect timing is rare
The other factor investors need to be mindful of is that sectoral funds typically see inflows after strong past performance, not before it. In other words, most investors jump in after the stocks have already rallied.
In the current environment, with increased news flow around defence spending and oil supply disruptions, there is a tendency for investors to chase recent winners. “This behaviour increases the probability of entering near peaks, especially since these sectors are sensitive to event reversals, such as easing tensions or corrections in crude prices,” said Mishra.
“Sectoral investing requires precise entry and exit timing, which is inherently difficult even for experienced investors. For retail participants, such tactical calls often lead to suboptimal outcomes,” said Priyanka Ketkar, a qualified personal finance professional and CEO of Purple Finch, a financial services firm.
While the early phase of the cycle often offers better entry points, missing it is not a concern if the core portfolio is well-positioned. Importantly, geopolitical events alone shouldn’t drive decisions, and allocations should be guided by fundamentals like earnings visibility and balance sheet strength. “A more prudent approach is to remain aligned with long-term asset allocation and goal-based investing,” said Ketkar.
Mayur Mandlekar, 48, director of commercial marketing & product management, Asia region at Stanley Black & Decker, continues to stick to a diversified investment strategy despite recent war-driven volatility. He has been adding funds at regular intervals during market dips without taking any sectoral calls in areas such as defence or oil. He is avoiding tactical shifts and maintaining a long-term disciplined approach, focusing on consistency rather than reacting to short-term market movements.
“I have always been a long-term and diversified investor. This strategy has worked well for me and has given me good returns. So I never felt the need to take tactical bets. Also, tactical bets mean you can win some and lose some,” said Mandlekar.
Limit exposure, avoid hype
According to Mota of Finnovate, current data indicates that a significant portion of investor inflows followed the massive rally in defense stocks, occurring only after valuations had already stretched significantly through February 2026. NAV trends showed a significant portion of returns were delivered in the early phase, while March saw a decent reversal in valuations and NAVs. “Current levels still reflect higher-valuation entry points for these sectors. This increases the risk of compressed future returns and short-term volatility, especially for investors entering at this stage,” Mota added..
For existing investors, experts recommended taking into account the cyclical nature of sectoral and thematic funds and avoiding over-concentration in a particular theme or sector. “Investors who have already invested in sectoral/thematic funds can consider shifting a part of their investments to other diversified segments, especially if their exposure is extremely high,” said Feroze Azeez, joint CEO, Anand Rathi Wealth. This can be done in phases to minimize timing risks while ensuring market participation.
Rebalance in time
The cyclical and often volatile nature of sectoral themes also makes periodic rebalancing essential. “If sectoral exposure exceeds 20% of the portfolio due to recent outperformance, investors should consider booking partial profits and rebalancing back to strategic levels,” said Ketkar. This disciplined approach enables systematic profit booking, lowers risk, and prevents sharp drawdowns when cycles reverse.
Staying invested without rebalancing could expose portfolios to unintended concentration risk, especially in late-cycle phases.
Investors should thus treat these investments as speculative satellites rather than core holdings. Chasing performance after the peak often leads to compressed or negative returns. Instead, focus on rebalancing outperforming sectors back into diversified funds to maintain long-term portfolio stability.