Green Energy Mutual Fund

Green Energy Mutual Fund refers to investments in companies that are involved in renewable energy sources.
Green Energy Mutual Funds
3 min
07-May-2024

The effects of climate change are becoming increasingly evident, making the call to prioritise sustainability particularly relevant. You can contribute to this goal and also benefit from it by investing in green energy mutual funds. They offer various benefits to investors, like diversification, potentially significant growth prospects and futuristic investments.

Let us examine what green energy mutual funds or clean energy mutual funds are, how they work:

What are Green energy mutual funds?

Green energy mutual funds are investment vehicles that pool funds from a group of investors and use the collective capital to purchase equity shares in companies in the renewable energy sector. They aim to capitalise on the expected growth in companies that generate and/or distribute green energy.

Since they focus exclusively on green or clean energy, clean energy mutual funds are categorised as thematic or sectoral funds. As per the guidelines of the Association of Mutual Funds in India (AMFI), such funds must allocate at least 80% of their assets in such green energy stocks.

Benefits of investing in green energy mutual funds

Investing in green energy mutual funds can be financially beneficial to you in many ways, depending on how the funds perform. Broadly, here are some of the top advantages that these clean energy mutual funds offer.

  • Risk mitigation through diversification: By adding green energy mutual funds to your portfolio, you get the benefit of diversification across different companies and a whole new sector. This, in turn, distributes risk and mitigates the overall vulnerability in your investments.
  • Potential profitability due to sectoral growth: With governments and companies across the world prioritising the switch to sustainable means of operations and production, the green energy market is growing rapidly. Investing in clean energy mutual funds allow you to tap into this potential growth.
  • Access to fund managers’ expertise: Since green energy mutual funds are not passive investments, they are actively managed by fund managers — who make all the decisions about which stocks to invest in, the asset allocation and the redemption schedule. By choosing these mutual funds, you can benefit from the experience of these experts.
  • Exposure to the best green energy stocks: These mutual fund schemes make it easier for you to gain exposure to the best green energy stocks in the market. The alternative to investing in green energy mutual funds would be to perform individual research and identify clean energy stocks yourself, which can be daunting and prone to errors in judgement.

How to know if green energy mutual funds are suitable for you?

Now that you know the meaning, benefits and risks of green energy mutual funds, you need to make an informed decision about selecting this investment avenue. Broadly, renewable energy mutual funds may be suitable for your portfolio if:

  • You are eager to invest in sustainable and renewable technologies.
  • You want to align your investments with your values.
  • You intend to diversify your investments and minimise risk.
  • You want to capitalise on the global shift in energy sourcing.
  • You have a long-term outlook in your investment strategy.

Things to keep in mind before investing in green energy mutual funds?

If you decide that your portfolio can benefit from investments in renewable energy mutual funds, ensure that you keep the following things in mind before you purchase the mutual fund units.

  • Look into the fund’s holdings and study the valuation of the companies in the basket of assets.
  • Assess your risk tolerance and ensure it is aligned with the fund’s risk exposure.
  • Check the fund’s historical performance to get an idea of how it has fared during regulatory changes and geopolitical tensions.
  • Evaluate the effectiveness of the fund’s management.
  • Ensure you are prepared for some volatility in this sector.
  • Diversify into other asset classes to minimise concentration risk.
  • Ensure the fund’s investment tenure, if any, is aligned with your investment outlook.

Risks associated with green energy mutual funds

Despite their benefits, clean energy mutual funds also have some limitations. You must be aware of these risks before making a SIP or lumpsum investment in these schemes. They include:

  • Increased volatility: The clean energy market can be quite volatile because it is influenced by geographical, political and technological changes.
  • Regulatory risks: Green energy mutual funds are also highly impacted by the regulations surrounding clean energy, which are constantly changing and evolving.
  • Limited history: Since sustainable investments have relatively low nativity, green energy mutual funds generally have a limited history that you can assess before investing.
  • Concentration risks: As will all thematic or sectoral funds, clean energy mutual funds are also subject to concentration risk as they invest 80% of assets in similar stocks.

Conclusion

The bottom line is that if you are looking for an easy way to diversify your investment portfolio and choose sustainable assets, green energy mutual funds make an excellent alternative. However, before you make an investment decision, make sure that you compare the mutual funds in this category, perform adequate research and choose the funds that align with your risk profile and investment goals.

If you are looking for one platform that can give you a variety of funds to choose from, Bajaj Finserv has just what you need. The Bajaj Finserv Mutual Funds Platform has over 1,000 mutual funds that you can choose from to achieve your financial goals as planned.

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Frequently asked questions

What is the fundamental principle of clean energy mutual funds?
The core theme of green energy mutual funds is sustainability and environment-friendly investments. This aligns with the rising awareness about the need for a green future.
Are green energy mutual funds risky?
Green energy mutual funds may carry the potential for steep growth, but they are market-linked investments in essence. So, they carry higher risks than debt and other conservative investment options
Are green energy mutual funds environment-friendly?
While these mutual funds do not directly contribute to a greener future, they do so indirectly by facilitating investments in companies that are sustainable and environment-friendly.
Do clean energy mutual funds support SIP investments?
Yes, you can invest in renewable energy mutual funds through SIPs. Alternatively, you can also make a lump sum investment in these funds.
How to track the performance of investments in renewable energy mutual funds?
With the digitisation of investments in India, you can now track the performance of clean energy mutual funds online, on the app or on the website supported by your AMC or stockbroker.
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