What is a Green Energy Mutual Fund?

When the Parikar household in Mumbai saw their energy bills rising month after month, they wasted no time in switching to green energy. Transitioning to solar rooftop panels and installing LEDs, they finally got a tight hold over their utility bills. It was at that moment when Mr Parikar thought, what if his investments could be part of this energy transition? For Mr Parikar and several others like him, green energy mutual funds could provide that gateway.

Read on to find out more about green mutual funds and their various aspects.

What Are Green Energy Mutual Funds?

Green energy mutual funds are mutual funds that invest in companies involved in renewable energy and clean technologies. In other words, the underlying portfolio of a green energy mutual fund comprises firms operating in industries such as biofuels, wind power, solar power, hydroelectricity, and electric vehicles (EVs), among others.

Also known as clean energy mutual funds, they invest at least 80% of their assets in companies operating in the clean energy sector.

Why Invest In Green Energy Mutual Funds?

Investing in clean energy mutual funds may spell several benefits for your portfolio. These include:

India’s Commitment Towards Green Energy

India is steadfast in its commitment to achieving net-zero emissions by 2070. Its key targets include 500 GW of renewable energy by 2030 and a 45% reduction in GHG emissions intensity. All of these positions are contributing to India’s green energy sector for significant growth in the coming days. Investing in clean energy mutual funds or green energy ETFs can help you ride this growth wave.

Expansion Of Renewable Energy Infrastructure

For a country like India, energy security is a critical issue. This is because India depends heavily on imported fossil fuels. This not only inflates bills but is also susceptible to price swings and geopolitical issues. That is why the Indian Government aims to expand its renewable energy infrastructure through:

• Subsidies for solar panels
• The PM KUSUM Scheme
• Green energy corridors

Portfolio Diversification

A diversified portfolio can help you better weather market volatility. It ensures the gains made do not get eroded due to fluctuations. In other words, pouring money into green energy mutual funds can not only help you leverage the growth of this rising sector but also help you diversify and stabilise your portfolio in the long run.

Factors To Consider Before Investing In Green Energy Mutual Funds While the road looks bright for clean energy mutual funds to do well, you need to consider certain things before investing in them. These include:

Thematic Risks

Since green energy mutual funds focus on companies operating in the renewable energy sector, they are considered thematic funds (funds focused on specific themes). This concentrated exposure makes them more sensitive to sector specific developments. Unfavourable market conditions, policy shifts, or a loss of momentum in the renewable energy sector can adversely affect the performance of these funds.

Long-term Performance

Closely analyse the fund’s long-term performance over a period of 5 to 8 years. Apart from the returns, see how well the fund has been able to contain losses during the bear phase. Equally essential is to gauge the consistency in returns. There are multiple independent third-party research websites from which you can find this crucial information.

Alignment With Goals

Just because the renewable energy sector is poised to do well, it is not necessary for you to chase it. Evaluate whether investing in such funds fits into your overall financial plan. And if it can help you achieve your set goals.

Conclusion

India’s growing energy demand and expansion of renewable energy infrastructure present a strong case for investing in green energy mutual funds. However, you need to consider the regulatory changes and other factors that might influence the industry.

Sources:

Moneycontrol
EY
Livemint