Best Mutual Funds to Invest in Renewable Energy in India

February 8, 2024 Mutual Fund

The future depends substantially on how we power our present needs. As every year goes by, the adverse effects of climate change are intensifying. As a result, the world is rapidly transitioning to green energy. Making a decision between renewable and non-renewable energy sources is more important than ever.

India is the 3rd largest energy-consuming country in the world. Due to its size and tremendous potential for growth and development, India’s energy demand is anticipated to rise more than any other nation in the coming years. Thus, it is imperative that most of this new energy demand is met by low-carbon, renewable sources.

The Central Electricity Authority (CEA) estimates that India’s power requirement will increase substantially and reach 817 GW (Giga Watts) by 2030. The majority of demand will be from the real estate and transportation sectors.

According to the REN21 Renewables 2022 Global Status Report, India stands as the 4th largest country in the world in terms of renewable energy capacity and wind power and ranks 5th in solar power capacity. India’s total installed renewable energy capacity touched the 168.96 GW mark by February 2023-end.

In a Rajya Sabha meeting in March 2023, Mr R K Singh, who serves as the Union Minister for Power, New and Renewable Energy, said, “Out of the total 168.96 GW, 64.38 GW is Solar power capacity, 51.79 GW is for Hydro, 42.02 GW Wind and 10.77 GW Bio power.”

With a goal of having net zero carbon emissions by 2070, India is at the forefront of the race for increasing the use of renewable energy. In the global effort against climate change, the announcement that India intends to meet 50% of its electricity needs from renewable sources by 2030 marks a historic point.

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

The Government has implemented a number of initiatives and programs and allocated sizeable sums of money in the Union Budget for FY 2023-2024 to support this vision and assist both the public and commercial sectors in reaching this goal.

To increase the production of high-efficiency solar modules, the Government committed Rs 19,500 crore (USD 2.57 billion) for a PLI scheme. India established a global initiative to accelerate clean energy development under the name Mission Innovation CleanTech Exchange.

This has created a favourable atmosphere for businesses that use Renewable Energy and has a significant future growth potential. As India looks to meet its energy demand on its own, which is expected to reach 15,820 TWh (TeraWatt-hour) by 2040, renewable energy is set to play an important role.

India’s Renewable Energy Sector is a prominent emerging industry experiencing swift advancement. The Government’s increased support and the economy’s improvement have made the sector more appealing to potential investors. With renewable energy stocks, many investors desire to invest in a more environmentally friendly future.

What are Renewable Energy Stocks?

Companies engaged in the development of substitute technologies to replace fossil fuels with renewable resources such as wind, solar, and hydropower are known as Renewable Energy Stocks. In addition, renewable energy comprises supporting technologies that are essential to the transition to green energy.

Renewable Energy is the next big thing due to rising environmental concerns, the exhaustibility of non-renewable sources, and the pollution they produce. With Government backing and increasing foreign investment in the Renewable Energy Sector (such as the US$75 billion investment from the UAE), more investments are expected to promote further investments in the country.

Renewable Energy is gaining traction in the investment world, and the stocks of several green energy companies are performing well making them a lucrative investment avenue. However, due to the considerable risk involved, direct investments in renewable energy stocks may not be suitable for all types of investors.

Given the diversified portfolios and expert management, investing in mutual funds with a substantial allocation to such renewable energy stocks may be a wise decision.

The Green Rush: How to Invest in Renewable Energy with Mutual Funds

Renewable energy mutual funds are equity-oriented funds that aim to invest in companies manufacturing and distributing renewable energy. A significant part of their portfolio is allocated towards green energy companies, making it a thematic mutual fund.

#1 – 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 3,884.94 crore and is benchmarked against Nifty Infrastructure TRI.

Nippon India Power & Infra Fund – Allocation to Renewable Energy Stocks

Data as of December 31, 2023
(Source: ACE MF, data collated by PersonalFN Research) 

The scheme invests across the market cap, and as of December 2023, it holds 42.80% allocation in large caps, 26.16% allocation in mid-caps and 24.26% in small caps.

Nippon India Power & Infra Fund holds maximum exposure in Renewable Energy Stocks like -L&T Ltd. at 6.51%, RIL at 6.35% and leading companies from the green energy sector such as Sterling and Wilson Renewable Energy Ltd. and Tata Power Company Ltd.

Currently, the overall exposure to Renewable Energy stocks accounts for 25.97% of the scheme’s assets.

#2 – Tata Resources & Energy Fund (Sectoral Fund)

Tata Resources & Energy Fund invests in a concentrated portfolio of equity & equity-related instruments of the companies in the Resources and energy sectors in India. The scheme does invest across market cap, and as of December 2023, the fund has a 56.40% allocation in large-cap stocks and 27.69% in mid-cap stocks, whereas 13.40% in small-cap stocks.

Tata Resources & Energy Fund – Allocation to Renewable Energy Stocks

Data as of December 31, 2023
(Source: ACE MF, data collated by PersonalFN Research) 

The scheme has an overall allocation of 21.58% to stocks of companies engaged in the green energy revolution. The highest exposure is in RIL and NTPC Ltd. In addition, the scheme has decent exposure to market leaders like Tata Power Company Ltd. and GAIL (India) Ltd.

#3 – Aditya Birla SL Focused Fund (Thematic Fund)

ABSL Focused Fund aims for long term capital appreciation by investing in upto 30 companies with long term sustainable competitive advantage and growth potential. The scheme invests across market cap, and as of December 2023, it holds 86.99% allocation in large caps, 10.29% allocation in mid-caps and 0.52% in small caps.

ABSL Focused Fund – Allocation to Renewable Energy Stocks

Data as of December 31, 2023
(Source: ACE MF, data collated by PersonalFN Research) 

The scheme holds a maximum exposure of 6.39% in stocks of L&T Ltd., which is aligned with the global movement towards use of renewable energy and adoption of clean technology, which will help meet India and the world’s future energy needs.

The scheme also carries an allocation to green energy companies like – NTPC Ltd. (National Thermal Power Corporation), which is under the ownership of the Ministry of Power and the Government of India, which is engaged in the generation of electricity and other activities. Currently, the overall exposure to Renewable Energy Stocks accounts for 15% of the scheme’s assets.

#4 Quant Flexicap Fund (Market Cap Fund)

Quant Flexicap Fund aims to seek to generate consistent to generate consistent returns by investing in a portfolio of Large Cap, Mid Cap and Small Cap companies. As of December 2023, the fund has a 38.53% allocation in large-cap stocks and 15.34% in mid-cap stocks, whereas 33.32% in small-cap stocks.

Quant Flexicap Fund – Allocation to Renewable Energy Stocks

Data as of December 31, 2023
(Source: ACE MF, data collated by PersonalFN Research) 

In terms of Renewable Energy Stocks, Quant ESG Equity Fund holds a high allocation of around 9.79% in RIL. The fund also has exposure to Adani Green Energy Ltd. and GAIL (India) Ltd. from the green energy segment. These stocks form around 13.01% of the fund’s assets.

Bear in mind it has a high exposure to small-cap stocks. The scheme is new in the market and does not have a long performance track record; thus, investors may consider their suitability before investing.

#5 DSP Natural Resources & New Energy Fund (Sectoral Fund)

Launched in December 2012, DSP Natural Resources & New Energy Fund invests in securities of companies domiciled in India whose pre-dominant economic activity is in the:

• Discovery, development, production, or distribution of natural resources, viz., energy, mining etc;
• Alternative energy and energy technology sectors, with emphasis given to Renewable Energy, automotive and on-site power generation, energy storage and enabling energy technologies.

The scheme currently has an AUM of Rs 869 crore. It invests across market cap, of which 54.30% is in large-cap stocks, 11.58% is in mid-cap stocks, and 9.80% in small-cap stocks.

DSP Natural Resources & New Energy Fund – Allocation to Renewable Energy Stocks

Data as of December 31, 2023
(Source: ACE MF, data collated by PersonalFN Research) 

The overall allocation to Renewable Energy Stocks is around 10.16%, and the highest is in stocks of Reliance Industries Ltd. The scheme also holds a fair exposure to GAIL (India) Ltd. stocks, which is committed to reducing carbon emissions and implementing renewable projects.

Mutual Funds investing in Renewable Energy Stocks could be a beneficial addition to one’s portfolio, provided his suitability is based on risk appetite, investment horizon, and goals.

The Road Ahead for Renewable Energy Sector in India

India is the market with the fastest growth in Renewable Energy, and new capacity additions are expected to double by 2026.

India’s target is to produce five million tonnes of green hydrogen by 2030. By 2030, India wants to have produced five million tonnes of renewable hydrogen. The manufacturing capacity for electrolyzers in India, which is anticipated to increase to 8 GW annually by 2025, is the objective for green hydrogen.

By 2030, India’s green hydrogen market might be worth $8 billion, and to increase its hydrogen production, the country will need at least 50 Gigawatts (GW) of electrolyzers. By using renewable energy sources instead of coal, India will save Rs 54,000 crore ($8.43 billion) yearly. Between 2020 and 2025, an additional 15,000 MW of wind-solar hybrid capacity is anticipated. Around 15,000 MW of wind-solar hybrid capacity is expected to be added between 2020-25.

India’s ambitious initiatives for renewable energy are transforming the country’s power industry. The demand for energy to power homes, businesses, and communities is being fueled by the growing population and extensive electrification in rural households.

As villages adopt clean energy, pollution levels will decrease as they become self-sufficient. While the Government emphasises more on the production of solar equipment, green hydrogen, and electric vehicles, it is anticipated that India’s renewable energy sector will see a good expansion in the coming years.

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

As increasingly effective batteries are utilised to store electricity, the cost of renewable energy sources is predicted to decrease by 66% by 2040 compared to the current cost, accounting for approximately 49% of all electricity production.

The Central Electricity Authority (CEA) estimates that by 2029-2030, the proportion of energy produced from renewable sources will increase from 18% to 44%.

To conclude…

All things considered, it is projected that the Renewable Energy Industry is on the path of conversion and is anticipated to have a great growth potential, making it a beneficial investment choice for individual investors seeking long-term capital growth with sustainability. Investors can gain exposure to this industry’s development by investing in Renewable Energy Stocks via mutual funds.

However, before investing, it is important to run a detailed analysis of the Renewable Energy producing and distributing companies. Since the Renewable 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, making sure that your mutual fund is holding stocks of worthy green energy companies can give you some relief.

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

This article first appeared on PersonalFN here