ESG funds are funds that allocate their corpus in stocks of companies that are evaluated on the basis of environmental, social, and governance factors. These companies are highly sustainable in their operations and attract investors.
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Top ESG Mutual Funds to Invest in 2022 for long-term growth
Till Date CAGR
|Aditya Birla Sun Life ESG Fund (G)|
|SBI Magnum Equity ESG Fund (G)|
|Mirae Asset Nifty 100 ESG Sector Leaders Fund of Fund (G)|
|Quantum India ESG Equity Fund (G)|
|Axis ESG Equity Fund (G)|
|Invesco India ESG Equity Fund (G)|
|ICICI Prudential ESG Fund (G)|
|Quant ESG Equity Fund (G)|
|Kotak ESG Opportunities Fund (G)|
ESG mutual funds are thematic mutual funds that focus on the theme – environmental, social and governance. Typically, a company or a fund is assessed based on its historical performance, business model, annual reports, etc. However, recently, investors have been considering additional factors such as environmental, social, and governance. These three factors come together to generate ESG funds, a new type of mutual fund.
Therefore, ESG funds invest primarily in stocks and bonds of firms that have been reviewed for environmental, social, and governance parameters.
Environmental factors include the organization’s greenhouse gas emissions, business model sustainability, and utilization of renewable resources, among other things. Similarly, social factors might include how they treat their employees, attitude towards work-life balance, equal opportunity for everyone of all genders and religions, etc. Finally, the governance aspect considers the company’s leadership diversity as well as its sensitivity to shareholders.
SEBI regulates ESG funds to invest at least 80% of their assets in securities that comply with the ESG theme. However, the remaining 20% cannot be invested in securities that are starkly in contrast to the core philosophy of the ESG theme.
For instance, a fund house decides not to invest in ‘sin goods’ companies, i.e., commodities harmful to society such as alcohol, tobacco, and so on. The fund should avoid investing in any FMCG company that deals in the tobacco business as one of its verticals.
Similarly, if a fund’s theme is to refrain from investing in companies that pollute the environment, it should avoid companies dealing in petrochemicals and pesticides.
|Fund Name||Returns Since Inception||Expense Ratio|
|SBI Magnum Equity ESG Fund||12%||2.01%|
|Axis ESG Equity Fund||15.3%||2.16%|
|Kotak ESG Opportunities Fund||10.1%||2.09%|
|Aditya Birla Sun Life ESG Fund||10.9%||2.30%|
|Quantum India ESG Equity Fund||15.6%||2.17%|
According to a research report, ESG theme mutual fund assets grew 4.7 times between November 2019 and November 2021. As of November 2021, the total AUM was INR 12,320 crore across ten funds. Furthermore, they are on track to grow even more as more similar schemes are created.
Currently, there are eight actively managed equity schemes, one ETF and one fund of fund (FoF). Post the COVID pandemic, the ESG theme has gained traction, and the future looks bright for the theme.
Indians are starting to look for sustainable alternatives for numerous reasons. Strict regulatory constraints have pushed companies to be more ESG compliant. In reality, companies have shut down, failing to comply with the rules. As a result, most companies started being more ESG compliant, seeing the fate of the failed companies. Apart from regulatory obligations, the interest of foreign investors is another factor that is encouraging companies to take ESG norms more seriously. Companies that are sustainable and ESG compliant are gaining the attention of foreign investors.
Consider investing in ESG Funds if you are a person who wishes to positively impact the world by being socially, ethically and environmentally responsible. Investing in ESG schemes is beyond financial benefit. The ESG fund’s objective is sustainability. Therefore, you cannot select funds based on just financial performance. You will have to analyze the portfolio and see how sustainable it is.
ESG funds are equity mutual funds. Therefore, a long-term investment horizon is a must. These thematic funds are highly volatile in the short term. Though the funds invest in high-quality stocks that comply with the ESG norm, the inherent market risk still prevails. Hence, these funds are highly volatile and invest only if you are comfortable with the risk levels. Furthermore, since ESG funds focus on one single theme, exposure of more than 10% to your portfolio is not advisable.
The ESG theme is trending in India; however, you should be careful while choosing a scheme to invest in. Following are some parameters that will help you select the best ESG mutual fund for investment:
Even though the ESG theme is in the nascent stage and gaining importance, its growth may not be permanent. ESG funds are highly susceptible to market pressures. Therefore, if you are an investor who understands the theme in-depth and is willing to undertake the volatility, you can consider investing in ESG mutual funds.