What Are Green Energy Mutual Funds?

What Are Green Energy Mutual Funds?

Green Energy Mutual Funds invest in businesses that develop and operate solar, wind, hydro, geothermal, and bioenergy solutions, aiming to support the transition to cleaner and more sustainable energy sources.

With increasing global efforts to combat climate change and reduce reliance on fossil fuels, mutual fund investing in green energy has gained traction among environmentally conscious investors. These funds not only provide a way to align financial goals with sustainability values but also offer potential for long-term growth as the demand for renewable energy continues to rise.
 

List of Green Energy Mutual Funds in India

In India, several funds focus on renewable energy sector mutual funds. Here are some notable green energy mutual funds in India:​

SBI Energy Opportunities Fund: This fund focuses on investing in companies involved in energy production, distribution, and infrastructure, including renewable energy sectors. As of November 4, 2024, it managed assets worth ₹11,717.96 crore, with an expense ratio of 0.57%. ​

ICICI Prudential Energy Opportunities Fund: Aiming for long-term capital appreciation, this fund invests in energy and power sector companies, encompassing traditional and renewable energy sources. As of November 4, 2024, it had assets under management (AUM) of ₹10,493.64 crore and an expense ratio of 0.43%. ​

Nippon India Power & Infrastructure Fund: This fund targets investments in power and infrastructure companies, including those in the renewable energy sector. As of November 4, 2024, it managed ₹7,863.43 crore in assets, with a 3-year Compound Annual Growth Rate (CAGR) of 32.23% and an expense ratio of 0.95%. ​

DSP Natural Resources & New Energy Fund: Investing in companies involved in natural resources and renewable energy, this fund had an AUM of ₹1,335.59 crore as of November 4, 2024, with a 3-year CAGR of 19.81% and an expense ratio of 0.97%.

Benefits of Investing in Green Energy Mutual Funds?

Diversification: Investing in energy mutual funds provides exposure to both traditional energy firms and emerging renewable sectors. This broad diversification can help mitigate risks by spreading investments across various asset types.

Sustainability Focus: Environmentally conscious investors can align their portfolios with sustainable initiatives through green energy mutual funds and renewable energy funds. Options like clean energy and solar energy mutual funds allow you to support eco-friendly projects while aiming for financial returns.

Growth Opportunities: The increasing global shift toward renewable energy is fueling the expansion of clean energy mutual funds in India. Investments in areas like solar energy and green hydrogen mutual funds may benefit from favorable government policies and advancements in technology.

Systematic Investment Plans (SIPs): Opting for a green energy SIP or renewable energy SIP enables gradual investment, leveraging the advantages of rupee cost averaging. This strategy can help in wealth accumulation over time.

Technological Innovation: Mutual funds that focus on cutting-edge energy solutions, such as green hydrogen mutual funds, provide exposure to potential breakthroughs in energy production and storage.
 

How to Choose the Best Green Energy Mutual Funds for Investing?

To choose the best green energy mutual funds for investing, consider the following factors:

Performance Over Time: Identify top-performing green energy mutual funds by analyzing their returns over 1-year, 3-year, and 5-year periods. This helps assess their stability and growth potential, especially in solar energy mutual funds in India and other renewable sectors.

Expertise of Fund Managers: Focus on funds managed by experienced professionals in the green energy industry. Their sector knowledge allows them to adapt to market trends and seize emerging opportunities.

Diversified Portfolio: Ensure the fund includes a balanced mix of renewable energy sectors such as solar, wind, and sustainable infrastructure. A well-diversified portfolio aligns with green investment objectives and minimizes sector-specific risks.

Cost Efficiency (Expense Ratio): Opt for funds with a lower expense ratio to maximize net returns. Lower costs enhance overall profitability, making these funds more attractive in the long run.

Risk Assessment: Select funds that match your risk appetite, striking a balance between high-growth potential and acceptable risk levels. Solar energy mutual funds in India, for instance, may offer promising returns but can also present specific investment risks.

Commitment to Sustainability: Verify that the fund genuinely prioritizes environmental sustainability rather than only partially allocating investments to green initiatives. True green energy funds should actively contribute to environmental progress.
 

Risks of Investing in Green Energy Mutual Funds

Market Volatility: Renewable energy mutual funds in India and globally are susceptible to fluctuations in market trends and economic conditions, which can influence returns.

Regulatory Impact: Investments in renewable energy mutual funds or ETFs in India are highly dependent on government policies, subsidies, and environmental regulations. Policy changes can either drive growth or create setbacks.

Rising Competition: The increasing demand for sustainable energy has intensified competition within the sector. This may affect the profitability of top green energy mutual funds and other renewable investment options.

Technological Uncertainty: Funds concentrated on specific technologies, such as solar or green hydrogen mutual funds, rely on continuous innovation. Delays or technological setbacks could impact overall fund performance.

Limited Historical Data: Newer funds, such as green energy mutual funds launched in 2024, often have shorter track records, making it challenging to predict long-term returns with confidence.

Economic Sensitivity: Broader economic factors, including fluctuations in energy prices and supply chain disruptions, can influence the performance of renewable energy mutual funds.
 

Taxation on Green Energy Mutual Funds as Per the 2024 Budget

If you invest in equity mutual funds, such as energy sector funds or green energy SIPs, and hold them for less than a year, any profit earned is categorized as short-term capital gains. Under the revised budget, these gains are now subject to a 20% tax rate, marking an increase from the previous 15%.

Long-Term Capital Gains (LTCG)

For equity mutual funds held for more than a year, profits are treated as long-term capital gains. The key modifications in the new budget include:

• Tax-Free Limit: Investors can enjoy a tax exemption on long-term gains up to ₹1.25 lakh per financial year, an increase from the prior threshold of ₹1 lakh.
• Tax Rate: Any gains exceeding ₹1.25 lakh will now be taxed at a fixed rate of 12.5%, up from the previous 10%.
• Indexation Benefit: A significant change is the removal of indexation benefits across all asset classes, including equity mutual funds.

Indexation was previously used to adjust an asset’s purchase price based on inflation, thereby reducing taxable capital gains. This method was especially beneficial for assets like property, gold, or unlisted investments, which were taxed at 20% with indexation applied. Under the new tax structure, a uniform 12.5% tax rate applies to all long-term capital gains, but without the option to adjust for inflation. While this simplifies taxation, it also removes a key benefit that previously helped lower taxable profits.
 

Wrapping Up

Investing in green energy mutual funds offers an opportunity to support sustainable initiatives while potentially achieving long-term financial growth. However, it’s essential for investors to conduct thorough research and carefully evaluate both the risks and potential returns before making investment decisions.