4 best energy sector mutual funds to invest in 2024

In the Interim Budget for the fiscal year 2024-25 in India, Finance Minister Nirmala Sitharaman reiterated the government’s dedication to electrifying one crore households using rooftop solar installations. The Pradhan Mantri Suryodaya Yojana, the flagship initiative behind this commitment, strives to furnish complimentary electricity to these households by empowering them to produce solar power independently.

During the interim budget speech, Ms Sitharaman added, “Through rooftop solarisation, one crore households will be enabled to obtain up to 300 units of free electricity every month, this would translate to benefits of ₹15,000-18,000 annually for households from free solar electricity and selling the surplus to the distribution companies.”

The budget papers unveiled on February 02, 2024, clearly signal a noteworthy surge in government expenditure on rooftop solar power initiatives. The spike from ₹2,167 crore in 2023-24 to ₹4,555 crore for 2024-25 underscores the government’s dedication to advancing this renewable energy source. This corresponds with the objectives delineated in the Pradhan Mantri Suryodaya Yojana.

The augmented allocation implies that the government is striving to expedite the program’s coverage, potentially electrifying a greater number of households through rooftop solar installations. This boost in the budget could have repercussions on the feasibility and timeline for attaining the 1 crore electrification target.

The expansion of India’s solar power sector is propelled by several key factors, including the decreasing costs of solar technology, increasing demand for renewable energy, strong government support, and the prevalence of large-scale solar projects currently dominating the installed capacity. The growth in the Indian solar energy sector is truly remarkable, offering enticing prospects for potential investors.

Investing in solar energy stocks carries inherent risks. Therefore, mutual funds that allocate funds to solar energy stocks may provide a more secure avenue for capitalizing on the increasing demand for solar energy, coupled with the government’s heightened focus on this sector. For certain investors, opting for mutual funds with a significant investment in solar energy stocks can be a favourable choice. Some of the most sought-after mutual funds in the solar energy space include:

Tata Resources & Energy Fund

The Tata Resources & Energy Fund primarily targets companies operating in the resources and energy sectors in India, with a preference for large-cap stocks. The fund predominantly allocates its investments to companies engaged in the resources sector (including metals, mining, and commodities) and the energy sector (encompassing oil, gas, power, and renewables) within the Indian economy. It maintains a relatively modest portfolio size compared to certain other diversified equity funds.

As of January 2024, the fund exhibited a notable distribution among various market capitalizations, with a substantial allocation to large-cap stocks at 57.54%, followed by mid-cap stocks at 26.01%, and small-cap stocks at 12.09%. This reflects a preference for well-established companies with larger market capitalizations.

Although these funds are inherently focused on growth, investors must remember that the resources and energy sectors are inherently cyclical. This implies that their performance can experience substantial fluctuations based on economic conditions and commodity prices. Exercise caution and be mindful of this inherent risk before making any investments.

This implies that investors should match their investment objectives with the fund’s goals. The fund is designed for long-term capital appreciation, suggesting that it may not be well-suited for those with short-term investment horizons.

Nippon India Power & Infra Fund

The Nippon India Power & Infra Fund is a mutual fund that focuses on investing in equity and equity-related instruments of companies involved in or associated with the power and infrastructure sectors in India, including power generation, transmission, distribution, renewable energy, construction, and transportation. The primary objective of the fund is to attain long-term capital appreciation through investments in these companies.

As of January 2024, the fund manages assets worth ₹3,884.94 crore, showcasing substantial investor interest in this sector. The fund’s performance is measured against the Nifty Infrastructure TRI, providing a basis for comparing its performance with the broader infrastructure sector in India.

Investors entering to invest their hard-earned money in this fund should be aware that sector-specific funds, such as this one, typically have a more concentrated focus compared to diversified equity funds. While this concentration may lead to higher returns, it also comes with elevated risks. This underscores the importance of researching the fund’s historical performance, as assessing the risk profile is crucial before making any investment decisions.

DSP Natural Resources and New Energy Fund

This is an open-ended equity mutual fund scheme provided by DSP Mutual Fund, focusing on investments in companies within the natural resources and energy sectors. These sectors encompass oil and gas, metals and mining, renewable energy, and utilities.

This fund aims to attain long-term capital appreciation by investing in a diverse portfolio of equity and equity-related instruments from companies involved in or associated with the natural resources and energy sectors, both in India and globally. The fund manager chooses stocks through a process of fundamental analysis, focusing on their potential for sustained long-term growth.

This fund is appropriate for investors with a long-term investment horizon of at least five years and a tolerance for high risk. It is also well-suited for investors who anticipate that the natural resources and energy sectors will demonstrate better performance than the overall market over the long term.

Being a sector-specific fund, this implies that it holds a more concentrated portfolio compared to a diversified equity fund. While this concentration may result in higher returns, it also comes with elevated risk. Investors should not only consider the inherent volatility associated with this fund but also take into account the higher expense ratio, which has the potential to reduce their overall returns.

SBI Energy Opportunities Fund

The focus on investing exclusively in energy stocks is apparent with the recent introduction of the SBI Energy Opportunities Fund by SBI Mutual Fund. The fund’s objective is to offer investors opportunities for long-term capital appreciation by investing in equity and equity-related instruments of companies involved in various activities, including exploration, production, distribution, transportation, and processing of traditional and new energy. This includes but is not limited to sectors such as oil and gas, utilities, and power.

Being a recent fund offer, it is challenging to predict the potential performance of this fund. However, based on historical performance, many mutual funds introduced by SBI Mutual Fund have demonstrated strong results, surpassing investor expectations. For investors who are indifferent to the risks associated with investing in new fund offers (NFOs) but are committed to pursuing long-term capital appreciation, this fund could be a favourable option.

As the scheme intends to invest in equity/equity-related instruments of companies involved in Energy and allied business activities, there is a likelihood of high concentration in companies within these sectors. Moreover, the volatility or unfavourable performance of these sectors and/or the stocks associated with them could significantly impact the Scheme’s performance, given the specific mandate and resulting concentration.

A glimpse at past performance

Investing in any mutual fund, irrespective of its sector emphasis, inherently involves the risk that past performance may not accurately predict future results. While reviewing historical data can offer insights into a fund’s strategy and performance history, it’s crucial to bear in mind that market conditions, company performance, and economic factors can undergo significant changes over time, influencing future returns.

The past performance serves as a significant indicator not only of the fund manager’s capabilities but also of the fund house’s commitment to achieving optimal returns for investors. This underscores the importance for investors to assess the past five-year or 10-year returns of any fund before making decisions about investing their money.

Considering mutual funds as an avenue for investing in energy stocks holds promise for investors aiming for long-term growth. However, it is essential for investors to carefully weigh both the potential advantages and risks. Diversifying investments and aligning them with individual risk tolerance is imperative. Engaging in well-informed decision-making can help mitigate risks, ensuring reasonable returns over the long term.