Green energy mutual funds are investment vehicles that specifically focus on companies involved in the renewable energy sector. Mostly, these companies are engaged in generating power from renewable sources like solar, wind, and hydroelectric energy. They also manufacture equipment necessary for renewable energy production, such as solar panels and wind turbines.
As an investor in a green mutual fund, you can support environmentally sustainable practices while potentially benefiting from the growth of the green energy market. These funds represent socially responsible investing and aim to generate financial returns alongside positive environmental impact.
Let us examine what green energy mutual funds or clean energy mutual funds are, how they work:
What is a green energy mutual fund?
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.
Why invest in green energy mutual funds?
Investing in green energy mutual funds is appealing for several reasons:
- Growth potential: The Indian government is aiming to significantly increase renewable energy capacity. This push can lead to substantial growth in the green energy sector and offer high returns for investors.
- Diversification: These funds spread investments across various renewable energy companies, such as those involved in solar, wind, hydro, biomass, and geothermal sectors. This diversification reduces risk by not depending on a single company or technology.
- Hedge against climate change: As the world shifts to a low-carbon economy, green energy companies are expected to perform better than traditional energy companies. By investing in these funds, you can hedge yourself against climate change risks.
- Sustainable investing: These funds allow you to invest in a way that supports environmental sustainability. As a green mutual fund investor, you can align your investment goals with positive environmental impact and help create a cleaner future while earning high returns.
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.
How to invest in a green energy mutual fund?
You can easily invest in green energy through mutual funds or index funds that focus on renewable energy. These funds pool money from investors to buy a diversified portfolio of green energy stocks and bonds. Each fund is managed with a specific strategy and targets different segments of the renewable energy market, such as solar, wind, or hydroelectric power.
By investing in these funds, you can support the growth of sustainable energy while earning considerable returns. Many of these funds are available through major investment platforms. You can simply pick the fund that suits your risk appetite and investment goals to get started.
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:
- Regulatory and policy risks: It must be noted that the renewable energy sector is heavily influenced by government policies, subsidies, and regulations. Changes in these can significantly impact the growth and profitability of green energy companies. For example, a reduction in government subsidies for solar power can negatively affect solar energy companies.
- Mitigation: Stay informed about the regulatory environment and any policy changes that can impact the sector. Always invest in a well-managed green energy mutual fund, as these funds usually have a team of experts who closely monitor policy developments and adjust the portfolio accordingly. Also, make sure that the funds you pick have a proactive approach to managing regulatory risks.
- Technology risk: The renewable energy sector is characterised by rapid technological advancements. New technologies can quickly make existing ones obsolete. Such advancements usually impact companies that fail to keep pace with innovation. Hence, investing in companies that are left behind technologically can result in underperformance.
- Mitigation: Choose funds managed by professionals with a strong track record of identifying and investing in companies that are at the forefront of technological innovation. These fund managers are more likely to select companies that can adapt to or even lead technological changes in the sector.
- Operational and financial risks: Green energy companies face various operational challenges, such as project delays, supply chain issues, or management problems. Sometimes, financial setbacks also occur that affect their stock prices and, consequently, the fund’s performance.
- Mitigation: Before investing, always research the financial health and operational track record of the companies in the fund’s portfolio. Prefer investing in funds that hold well-established companies with strong financial positions. That’s because these companies are generally better equipped to handle operational challenges and financial difficulties.
- Liquidity risk: Some green energy stocks have lower trading volumes, which can lead to liquidity issues when buying or selling shares. Also, such low liquidity makes it difficult to enter or exit positions without significantly affecting the stock price.
- Mitigation: Opt for funds that invest in a mix of both large and mid-sized green energy companies. Larger companies mostly have higher trading volumes and better liquidity, which can help mitigate liquidity risks. Additionally, diversified funds that spread investments across various segments of the green energy sector reduce the impact of liquidity issues.
Key takeaways
- These funds invest in companies within the renewable energy sector, such as those involved in solar, wind, and hydroelectric power, promoting environmentally sustainable practices.
- With the global shift toward clean energy, green energy mutual funds offer the chance to benefit from the growth of the renewable energy market.
- Investing in green energy mutual funds provides portfolio diversification, which can help reduce risk by spreading investments across multiple renewable energy companies.
- Green energy funds are actively managed, allowing investors to benefit from the expertise of fund managers who handle stock selection, asset allocation, and risk management.
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.
