What Is Green Energy Mutual Fund in India?

The renewable energy market is playing an increasingly major role in the world, and many people are searching for opportunities to invest in this growing sector called green energy. However, one of the most frequent choices for investing in renewable energy is through mutual funds. But, the question which is confusing people is what it means? So, let’s learn all about natural and green energy mutual funds through this blog.

Green energy mutual fund meaning

A specific class of mutual funds known as “green energy mutual funds” focuses on funding businesses engaged in the renewable energy industry and associated environmental projects. Green energy funds function similarly to traditional mutual funds, pooling the capital of several investors and distributing it to companies using renewable energy sources, including solar, wind, hydroelectric power, geothermal energy, and others. 

Furthermore, you may help promote a cleaner, more sustainable future and lessen carbon footprints indirectly by investing in mutual funds that focus on renewable energy.

How do green energy mutual funds work?

• Investors buy a green energy mutual fund’s units to represent their portion of the fund’s assets.
• The fund then makes investments using this money in a range of sustainable energy enterprises.
• The investors receive a distribution of the returns from these investments according to the units they own.
• These returns may take the shape of capital gains, dividends, or profit reinvested.

Why invest in green energy mutual funds?

Let’s discuss why it is beneficial to invest in natural and green energy mutual funds: –

1. Encouragement of clean energy

You can contribute to the expansion and advancement of sustainable energy sources by making investments in green energy mutual funds. However, this moves us closer to a more sustainable future by lowering the reliance on fossil fuels.

2. Possibility of large profits

The potential for large gains is expanding along with the renewable energy sector’s rapid growth. Moreover, global governments’ efforts to lower carbon emissions will raise demand for renewable energy sources, creating chances for the industry to expand.

3. Diversification of portfolio

Natural and green energy mutual funds enable you to lower risk and diversify your portfolio. This means you can spread out your assets and lessen the effect of a single company’s performance on your total returns by making various investments in different companies.

4. Socially responsible investment

Green energy mutual funds enable investors to allocate their capital to businesses that positively benefit the environment and society, in line with the principles of socially responsible investing.

Various factors to consider before investing in green energy mutual fund

1. Risk tolerance

As with any investment, there are risks associated with green energy mutual funds. So, before investing, identify your level of risk tolerance and be aware that the industry may see volatility as a result of developments in technology and regulations.

2. Diversification

Although the green energy industry is a promising one, it is still important to maintain a balanced approach to investing. So, you may want to consider allocating a portion of your portfolio to green energy mutual funds.

3. Track record

Next, examine the mutual fund manager’s past performance as well as their track record. This means a consistent track record suggests efficient management.

4. Long-Term Horizon

Long-term investors are typically better prepared to make green energy investments. However, it can take some time for the sector to reach its full growth potential.

5. Ratios of Expense

Examine and contrast the various funds’ expense ratios. This means, reduced expenses may improve your total return on investment.

List of green energy mutual funds in India

1. DSP Natural Resources & New Energy Fund

This DSP fund aims to provide long-term wealth appreciation while promoting positive change, with a focus on companies that are dedicated to ethical business practices. With a market capitalization of over ₹730 crore and more than a decade of existence, DSP’s green energy mutual fund surpasses Tata Resources & Energy Fund in size. With an annual percentage return of 16.41%, the typical returns are very healthy.

2. Tata Resources & Energy Fund

On December 28, 2015, Tata Mutual Fund introduced this fund. By allocating around 80% of its net assets to equities or equity-related instruments of Indian companies operating in the resources and energy sectors, the Tata Resources & Energy Fund seeks to achieve long-term capital appreciation. 

As of February 28, 2023, the fund’s AUM is Rs. 232.18 cr. As of March 27, 2023, the NAV stands at Rs. 27.14. Additionally, a minimum investment of Rs. 5,000 is needed to participate in the Tata Resources & Energy Fund.

What are the drawbacks of green energy mutual funds?

While green energy mutual funds offer many dvantages, it’s important to also consider the potential drawbacks before investing. Some possible drawbacks include:

1. Higher Fees

As with any mutual fund, there are fees associated with managing and operating the fund. Green energy mutual funds may have higher fees due to the specialized nature of the investments.

2. Market Fluctuations

As with any investment, there is always a risk of market fluctuations. If the clean energy sector experiences a downturn, it can negatively impact the performance of green energy mutual funds.

3. Limited Investment Options

Since green energy mutual funds are still a relatively new concept, there may be limited options available for investors. This can make it challenging to find the right fund that aligns with your investment goals.

The current scenario of green energy mutual funds in India

India has been one of the prominent countries in terms of investment especially in renewable energy sources, making it an attractive market for green energy mutual funds. As per the report by the International Energy Agency, India is expected to add over 700 GW of renewable energy capacity by 2040. This growth potential has led to an increase in the number of green energy mutual funds in the market.

However, there are still challenges that need to be addressed, such as policy and regulatory uncertainties, lack of infrastructure, and limited domestic manufacturing capabilities. These factors can affect the performance of green energy mutual funds in India.

The bottom line

Mutual funds that invest in businesses in the renewable energy industry are known as green energy mutual funds. They provide various advantages, including portfolio diversification, the possibility for large returns, and assistance for sustainable development. They do, however, have certain disadvantages, such as increased fees and market volatility. 

The market for green energy mutual funds is expanding in India, but there are still issues that must be resolved if it is to continue expanding and succeeding. Before investing in green energy mutual funds, as with any investment, it is essential to assess your financial goals and risk tolerance thoroughly.

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