Top 5 Green Energy Mutual Funds: Powering Your Portfolio with Sustainability

Jun 12, 2024 / Reading Time: Approx. 15 mins

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Top 5 Green Energy Mutual Funds: Powering Your Portfolio with Sustainability

In the dynamic landscape of global energy, India stands as a beacon of ambitious renewable energy goals. With a rapidly growing population and a burgeoning economy, India's energy demands are significant. However, the nation is resolutely turning towards a greener future, one powered by the sun, wind, and other sustainable sources.

Several factors are propelling India's green energy sector. Firstly, the government has set ambitious renewable energy targets. The aim is to achieve 500 GW of installed renewable energy capacity by 2030, a goal that necessitates continued growth. Additionally, the falling costs of renewable technologies, particularly solar, are making them increasingly competitive with traditional fossil fuels.

Furthermore, India's growing energy needs and its dependence on imported fossil fuels are driving the search for domestic, sustainable alternatives. The environmental concerns associated with coal-based power generation are also pushing the country towards cleaner options.

[Read: Investing in India's Electrifying Future: Top 5 Power & Energy Sector Mutual Funds]

Finance Minister Nirmala Sitharaman reaffirmed the government's commitment to electrifying one crore homes through rooftop solar systems in the Interim Budget for the Indian fiscal year 2024-25. The flagship initiative driving this commitment is the Pradhan Mantri Suryodaya Yojana, that aims to provide these homes with free electricity by enabling them to generate solar power on their own.

This presents a unique opportunity for investors seeking not just financial returns but also a chance to contribute to a sustainable future. Green energy mutual funds offer a convenient way to tap into this potential by investing in a basket of companies leading the clean energy revolution.

What is Green Energy?

Although the phrases 'Green Energy', 'Renewable Energy' and 'Clean Energy' are often used interchangeably, they have some distinctions. All of them share the trait of being utilised more and more to produce energy in an effort to gradually reduce reliance on fossil fuels, such as gas and coal, which are major contributors to climate change.

The term 'Renewable' refers to energy derived from naturally occurring sources that are continuously renewed, such solar and wind power. Sustainable energy is another term for renewable energy. Renewably sourced energy might not be seen as 'Green' if, for instance, the activities that provide the energy-like infrastructure construction involve some carbon emissions.

In contrast to fossil fuels, which take millions of years to develop, green energy refers to renewable energy sources that replenish spontaneously on a timescale that is relevant to humans. These sources don't release any harmful greenhouse gases that worsen climate change, which makes them eco-friendly.

Some of the most common types of green energy include - wind energy, solar energy, hydropower, geothermal energy, biomass energy.

Why invest in Green Energy Mutual Funds?

Several compelling reasons make green energy mutual funds an attractive investment option:

  • Growth Potential: The Indian government has set ambitious targets for renewable energy capacity, driving significant growth in the sector. This translates to potential for high returns for investors in green energy mutual funds.

  • Diversification: These funds invest in a variety of companies across the green energy spectrum, including solar, wind, hydro, biomass, and geothermal. This diversification mitigates risk by not being overly reliant on the performance of a single company or technology.

  • Hedge Against Climate Change: As the world transitions towards a low-carbon economy, green energy companies are expected to outperform traditional energy sources in the long run. Investing in green energy funds allows you to hedge against the potential risks associated with climate change.

  • Sustainable Investing: Green energy mutual funds align your investment goals with a positive environmental impact. You can contribute to a cleaner future while aiming for financial gains.

 

Here's a list of top 5 green energy mutual funds in India:

#1 - Quant Focused Fund

Quant Focused Fund invests in a focused portfolio of large cap 'blue chip' companies. Launched in August 2008, the scheme currently has an AUM of Rs 1,003.94 crore and is benchmarked against Nifty 500 TRI.

Quant Focused Fund - Allocation to Green Energy Stocks

Stocks Holding %
Reliance Industries Ltd. 9.44
Tata Power Company Ltd. 8.30
Adani Green Energy Ltd. 5.61
Data as of May 31, 2024
Do note past performance is not an indicator of future returns
The securities quoted are for illustration only and are not recommendatory.
(Source: ACE MF, data collated by PersonalFN Research)
 

The scheme invests in a concentrated portfolio of large-cap companies, and as of May 2024, it holds a major 80.05% allocation in large caps and 19.95% in others.

Quant Focused Fund holds maximum exposure in Green Energy Stocks like - RIL at 9.44%, Tata Power Company Ltd. at 8.30%, with a strong focus on solar and wind power projects, the company aims to achieve a production capacity of 25% from green sources by 2025.

And 5.61% in leading company from the green energy sector - Adani Green Energy Ltd., it develops, owns, and operates utility-scale grid-connected solar, wind and hybrid renewable power plants.

Currently, the overall exposure to Green Energy stocks accounts for 23.34% of the scheme's assets.

#2 - Nippon India Power & Infra Fund (Sectoral Fund)

Nippon India Power & Infra Fund invest predominantly in companies that are engaged in power and infrastructure space in India. The scheme currently has an AUM of Rs 5,697.01 crore and is benchmarked against Nifty Infrastructure TRI.

Nippon India Power & Infra Fund - Allocation to Green Energy Stocks

Stocks Holding %
Larsen & Toubro Ltd. 6.44
Reliance Industries Ltd. 6.03
Tata Power Company Ltd. 1.92
Praj Industries Ltd. 1.37
Sterling and Wilson Renewable Energy Ltd. 1.23
Data as of May 31, 2024
Do note past performance is not an indicator of future returns
The securities quoted are for illustration only and are not recommendatory.
(Source: ACE MF, data collated by PersonalFN Research)
 

The scheme invests across the market cap, and as of May 2024, it holds 41.86% allocation in large caps, 23.89% allocation in mid-caps and 27.87% in small caps.

Nippon India Power & Infra Fund holds maximum exposure in Green Energy Stocks like -L&T Ltd. at 6.44%, RIL at 6.03% and leading companies from the green energy sector such as Tata Power Company Ltd., Praj Industries Ltd. and Sterling and Wilson Renewable Energy Ltd.

Currently, the overall exposure to Green Energy stocks accounts for 16.99% of the scheme's assets.

#3 - SBI Infrastructure Fund (Sectoral Fund)

SBI Infrastructure Fund invests in a diversified basket of equity stocks of companies directly or indirectly involved in the infrastructure growth in the Indian economy and in debt & money market instruments.

The scheme emphasizes to invest in stocks only from the underlying sector, and as of May 2024, the fund has a 37.48% allocation in large-cap stocks and 17.90% in mid-cap stocks, whereas 34.09% in small-cap stocks. Bear in mind it has a high exposure to small-cap stocks, one must ensure their risk tolerance and suitability before investing.

SBI Infrastructure Fund - Allocation to Green Energy Stocks

Stocks Holding %
Reliance Industries Ltd. 7.41
Larsen & Toubro Ltd. 3.80
Indian Energy Exchange Ltd. 3.12
GAIL (India) Ltd. 2.38
Data as of May 31, 2024
Do note past performance is not an indicator of future returns
The securities quoted are for illustration only and are not recommendatory.
(Source: ACE MF, data collated by PersonalFN Research)
 

The scheme has an overall allocation of 16.72% to stocks of companies engaged in the green energy revolution. The highest exposure is in RIL at 7.41%. In addition, the scheme has decent exposure to market leaders like L&T Ltd., Indian Energy Exchange Ltd. and GAIL (India) Ltd.

#4 - Franklin Build India Fund (Thematic Fund)

Franklin Build India Fund aims for capital appreciation through investments in companies engaged either directly or indirectly in infrastructure-related activities. The scheme invests in companies with high growth potential under the infrastructure sector seeking to develop India's landscape. As of May 2024, it holds 48.72% allocation in large caps, 13.53% allocation in mid-caps and 32.67% in small caps.

Franklin Build India Fund - Allocation to Green Energy Stocks

Stocks Holding %
Larsen & Toubro Ltd. 9.06
Reliance Industries Ltd. 4.31
Praj Industries Ltd. 1.44
Data as of May 31, 2024
Do note past performance is not an indicator of future returns
The securities quoted are for illustration only and are not recommendatory.
(Source: ACE MF, data collated by PersonalFN Research)
 

The scheme holds a maximum exposure of 9.06% in stocks of L&T Ltd., which is aligned with the global movement towards use of green energy and adoption of clean technology, which will help meet India and the world's future energy needs.

The scheme allocates to green energy companies like – RIL and Praj Industries Ltd., which is a globally leading company with a bouquet of sustainable solutions for bioenergy, high purity water, supplier of ethanol plants, etc. Currently, the overall exposure to Green Energy Stocks accounts for 14.82% of the scheme’s assets.

#5 Bank of India Mfg & Infra Fund (Sectoral Fund)

Bank of India Mfg & Infra Fund seeks to generate long term capital appreciation through a portfolio of predominantly equity and equity related securities of companies engaged in manufacturing and infrastructure and related sectors.

As of May 2024, the fund has a 30.99% allocation in large-cap stocks and 28.67% in mid-cap stocks, whereas 37.61% in small-cap stocks.

Bank of India Mfg & Infra Fund - Allocation to Green Energy Stocks

Stocks Holding %
Reliance Industries Ltd. 6.21
Larsen & Toubro Ltd. 5.96
Sterling and Wilson Renewable Energy Ltd. 1.42
Tata Power Company Ltd. 0.89
Data as of May 31, 2024
Do note past performance is not an indicator of future returns
The securities quoted are for illustration only and are not recommendatory.
(Source: ACE MF, data collated by PersonalFN Research)
 

In terms of Green Energy Stocks, BOI Mfg & Infra Fund holds a high allocation of around 6.21% in RIL. The fund also has exposure to L&T Ltd., Sterling and Wilson Renewable Energy Ltd. and Tata Power Company Ltd. from the green energy segment. These stocks form around 14.48% of the fund's assets.

Bear in mind it has a high exposure to small-cap stocks, investors may consider their suitability before investing.

India's green energy sector presents a plethora of investment opportunities. Mutual Funds investing in Green Energy Stocks could be a beneficial addition to one's portfolio, provided his suitability based on risk appetite, investment horizon, and goals.

The Green Energy Sector: A Sustainable Path for India

India's green energy sector is at a critical juncture, poised for exponential growth. By addressing existing challenges and leveraging the vast potential, India can achieve energy security while combating climate change. This transition will not only benefit the environment but also create new jobs, drive economic growth, and position India as a leader in the global green energy revolution.

India's Green Energy Sector has witnessed phenomenal growth in recent years. As of April 2024, the installed capacity of non-fossil fuel sources, including large hydro and nuclear, stands at a staggering 199.85 GW. This translates to a remarkable 45.1% share of the country's total energy capacity, a testament to India's commitment to clean power.

Leading the charge is solar energy. With a 30-fold increase in installed capacity over the past nine years, India boasts a phenomenal 82.63 GW of solar power. This growth is fueled by India's abundant sunshine and ambitious government targets aiming to tap into the estimated 748 GW solar potential as per the National Institute of Solar Energy (NISE).

Wind power is another significant contributor, with a current installed capacity of 46.16 GW. Large Hydropower remains a crucial source, contributing 46.92 GW. Other renewable sources like biomass, small hydro, and waste-to-energy are also steadily gaining traction.

Moreover, government agencies like SECI (Solar Energy Corporation of India) are regularly issuing tenders for setting up large solar and wind power projects across various states. Initiatives like Production-Linked Incentives (PLIs) for solar and storage equipment manufacturing are promoting domestic manufacturing and reducing reliance on imports.

[Read: Top 5 Mutual Funds with High Exposure to EV Revolution]

Despite the remarkable progress, the Indian green energy sector faces some challenges:

Integrating large amounts of variable renewable energy sources like solar and wind into the existing grid infrastructure requires significant upgrades. Securing land for large-scale green energy projects can be a complex process due to legal and social issues.

Investments in grid modernization and smart grid technologies may enhance grid flexibility and accommodate renewable energy sources. But, fostering a skilled workforce equipped to handle the green energy revolution will be a critical task.

However, benefits of embracing green energy are multifaced and India's green energy sector is poised for continued growth.

To conclude...

India's Green Energy Sector is a story of ambition, innovation, and a steadfast commitment to a sustainable future. By addressing existing challenges and leveraging its strengths, India can become a global leader in the green energy revolution. This shift towards clean energy sources has the potential to transform not only India's energy landscape but also set a precedent for sustainable development on a global scale.

However, before investing, it is important to run a detailed analysis of the Green Energy producing and distributing companies. Since the Green Energy Sector is relatively new, there is a possibility that many companies may not be profitable, while some may have just started reporting profits. So, make sure that your mutual fund is holding worthy green energy stocks that could benefit from potential growth of the company.

Also, before investing, one should examine the performance of mutual fund schemes with a high allocation to Green Energy Stocks. Do note that only a limited portion of your portfolio should be allocated if one considers investing in such Sectoral/Thematic Funds.

Note: In my previous article I have covered a detailed analysis of mutual funds focused on renewable energy and the road ahead for India's renewable energy sector. You may consider reading - Best Mutual Funds to Invest in Renewable Energy in India

Disclaimer: PersonalFN does not receive any monetary compensation from the fund house or scheme names stated in the article.

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MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.
She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.

 


Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.

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