Green Energy Mutual Funds Explained: Benefits, Risks, and How to Choose

According to the International Renewable Energy Agency (IRENA), 90% of the world’s electricity will come from sustainable sources by 2050.

This massive shift towards renewable energy has developed various companies creating sustainable solutions and taking steps to make the planet greener in the coming years. This, in turn, creates opportunities for investors to invest in green energy. 

If you are willing to create wealth by choosing sustainable investment opportunities, green energy mutual funds are the best choice for you. Read this blog to explore the benefits, risks, and tax-related information.

Quick Synopsis 

• Investing in green energy mutual funds allows individuals to benefit while making a positive environmental impact.
• The best renewable energy mutual funds include ICICI Pru Energy Opportunities Fund, Tata Resources and Energy Fund, and SBI Magnum Global ESG Fund.
• Taxation of clean energy mutual funds ranges between 12.5% (for LTCG) and 20% (for STCG).

What are Green Energy Mutual Funds? 

Green energy mutual funds are investment instruments that primarily focus on companies or entities belonging to the renewable energy sector. In simple terms, these funds or investment instruments invest in companies that are producing energy from sustainable resources such as solar, wind, water, heat, and biomass.

Since they exclusively focus on the clean energy sector, they are sectoral mutual funds. According to the Association of Mutual Funds in India (AMFI), these funds must invest 80% of their collective capital to buy clean energy stocks. 

Types of Energy Mutual Funds 

Along with understanding what green energy mutual funds are, we must also learn about the energy mutual funds that can be explored for investment. 

Green Energy Mutual Funds and Renewable Energy Mutual Funds

These mutual funds belong to a particular theme, so they are considered thematic mutual funds that focus on entities that produce energy via sustainable resources. They include wind energy mutual funds and solar energy mutual funds in India, which are issued to deliver sector-specific exposure.

Traditional Energy Sector Mutual Funds

These funds invest their capital in companies that produce energy from gas, coal, oil, and traditional energy resources. Such renewable energy mutual funds are issued mostly after being influenced by the worldwide consumption of fossil fuels.

Renewable Energy ETFs and Green Energy ETFs

Compared to traditional energy sector mutual funds, these ETFs offer flexibility to their investors. Along with this, they incur potentially lower charges and a chance to evaluate the performance of key energy indices.

Benefits of Investing in Green Energy Mutual Funds 

• High Returns Probability: As the whole world is focusing on renewable energy, and governments of different nations are taking initiatives, there is a high chance that the green energy sector will witness growth in the upcoming years, leading to long-term and high-return profitability opportunities.
• Diversification: With the decision to invest in clean energy mutual funds, you can get the advantage of diversifying your portfolio. Various companies produce energy from solar, wind, biomass, water and heat. Therefore, it reduces the risk of poor performance from a single sector.
• Managed by Industry-experts: By investing in renewable energy mutual funds, you ensure that professional and sector-specific fund managers, leading to maximum growth and reduced risk, allocate your funds strategically. 
• Systematic Investment Plans (SIPs): When you opt for a renewable energy mutual fund to invest in, you get the chance to choose the systematic format. You invest a fixed amount at a regular interval (such as monthly or quarterly) and create wealth over time.
• Technological Innovation: Energy mutual funds that allocate their capital to companies involved in advanced energy innovations, such as green hydrogen mutual funds, offer exposure to promising developments in the upcoming years.

Reasons to Invest in Green Energy in 2025

1. Government Policies: According to PM Modi, our country is committed to achieving the Net Zero emissions target by 2070. Along with this, the government has taken some initiatives, such as production-linked incentives (PLIs) and electronic vehicles, which create a great potential for investors to invest in climate-focused mutual funds. 
2. Global Trends: Besides the government policies, the regulation of ESG is becoming stricter across nations. There are America's SEC and Europe's SFDR climate disclosures that are redefining the entire industry.
3. Growth Opportunities: According to the government website, the Indian EV market is developing at a rocket speed and is predicted to become a $113.99 billion industry by 2029. Apart from that, the solar energy adoption rate is also significant in both residential and industrial sectors.

Taxation on Green Energy Mutual Funds 

• Short-term Capital Gains (LTCG): If you hold units of green energy funds for less than 12 months, you incur short-term capital gains, taxed at a rate of 20%.
• Long-term Capital Gains (LTCG): If you hold units of clean energy funds for more than 12 months, you are levied long-term capital gains, taxed at a rate of 12.5%.

Risks of Investing in Green Energy Mutual Funds 

• Regulatory and Policy Guidelines: You must be aware that clean energy mutual funds are heavily controlled by government policies and regulations. A minor change can greatly affect the growth rate of companies belonging to this sector. Thus, in turn, it impacts your return potential as well. 
• Operational and Financial Risks: Companies engaged in producing green energy face a lot of operational challenges, such as supply chain disruptions, project postponement, financial issues or project mismanagement. These setbacks negatively impact stock prices and hinder potential growth.
• Liquidity: Some clean energy funds come with lower trading volumes, leading to increased liquidity risk when buying and selling units. To mitigate this risk, you should invest in large and mid-sized renewable energy companies offering better liquidity.

How to Choose the Best Green Energy Mutual Funds?

Before investing in green energy mutual funds, you should know how to zero down on the perfect mutual fund that is worth your money. Here is the checklist for your reference: 

• Check Historical Performance: Find out the top-performing funds by evaluating their returns over 1-year, 3-year or 5-year periods. If the returns are consistent that indicates stability and assured growth.
• Evaluate Fund Manager Expertise: Choose funds that are managed not only by professional fund managers but also by managers with experience navigating the renewable energy sector. They can better handle changes due to policy shifts and new technology implementation, which is crucial in sectoral mutual funds in India. 
• Diversify Portfolio: Opt for funds that are concentrated across diverse clean energy segments such as wind, solar, hydropower, biomass, and geothermal energy. It helps spread the risk and ensures environmentally responsible investing.
• Expense Ratio: The lower the expense ratio, the more you can preserve your returns. So, choose clean energy mutual funds that come with a lower expense ratio to make it cost-efficient for the long term. 

When investing in green energy mutual funds, it's essential to consider several factors. This includes examining the fund's holdings, assessing your risk tolerance and financial objectives, researching the valuation of the companies involved, and preparing for potential market volatility.

By keeping these factors in mind, you can ensure a higher return while dealing with an unpredictable market climate.

Low risk tolerance? Looking for investment instruments with zero risk? Opt for a fixed deposit via the Stable Money platform and avail up to 8.40% interest annually! 

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