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

January 1, 2024 Mutual Fund

India’s power and energy sector is undergoing a thrilling transformation, fueled by a potent cocktail of rising demand, ambitious renewable energy targets, and government initiatives.

From the colossal might of coal-fired plants to the burgeoning brilliance of solar farms, this domain is shaping the nation’s economic pulse and illuminating the path to a sustainable future.

While the power & energy sector thrives on a diverse mix of sources, coal remains the kingpin, accounting for nearly half of total electricity generation. However, the winds of change are blowing, with renewable energy sources rapidly gaining ground.

Renewables, including solar, wind, and other sources, now comprise over 30% of the nation’s installed capacity, a remarkable testament to the country’s commitment to clean energy. Out of all the G20 countries, India is the only one that is on pace to meet the targets outlined in the Paris Agreement.

India has set a high goal for itself: 500 GW of renewable energy capacity by 2030. This will decarbonize the country’s energy mix, generate a tonne of green employment, and draw in foreign investment.

Despite the impressive generation capacity, India faces challenges in efficiently transmitting power across its vast geography. Upgrading and expanding the transmission network is crucial to ensuring equitable distribution and minimizing losses.

The intermittent nature of solar and wind power necessitates robust energy storage solutions. Investing in battery technologies and exploring pumped hydro options will be vital for stabilizing the grid and maximizing the potential of renewables.

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The Indian Power & Energy Sector

India is the third-largest producer and consumer of electricity worldwide, with an installed power capacity of 423.25 GW as of July 31, 2023. This translates to powering millions of homes, industries, and businesses across the vast expanse of the country.

In FY23, India’s power generation climbed by 8.87% to 1,624.15 billion kWh, marking the greatest growth rate in over 30 years. India consumed 130.57 BU of power in April 2023, according to data from the Ministry of Power.

As per the National Electricity Plan 2022-32, the power production industry in India is expected to require a total investment of Rs. 33 lakh crore (US$ 400 billion) and 3.78 million power professionals by 2032 to meet the increasing energy demands.

One of the major participants in the electric vehicle (EV) charging infrastructure market, Tata Power, teamed up with the Ayodhya Development Authority in June 2023 to install EV charging stations in public parking lots all across the city.

Over the past few years, the Ministry of Power and Energy has worked hard to construct a unified national grid, strengthen the distribution network, and achieve universal household electrification in an attempt to transform the nation from one experiencing a power shortage to one experiencing a surplus.

Government measures for the expansion of this industry…

• In the Union Budget 2022-23, the government set out USD 885 million (about Rs. 7,327 crore) for grid, off-grid, and PM-KUSUM solar power projects.
• The Ministry of New and Renewable Energy has created a National Portal to promote rooftop solar (RTS) across the nation. Through this portal, residential customers from all across the nation can apply for rooftop solar without having to wait for Discom to complete the tender and select suppliers.
• To address the yearly problem of coal demand-supply mismatch and meet India’s 500 GW renewable energy objective, the Ministry of Power has identified 81 thermal units that would switch from coal to renewable energy generation by 2026.
• The Indian government started the Pradhan Mantri Sahaj Bijli Har Ghar Yojana, or ‘Saubhagya’, with the goal of electrifying every home.

Apart from this, the government has launched various PLI schemes and plans to boost the evolution of the Indian power & energy industry and their contribution towards the nation’s GDP growth.

Investing in India’s Energy Powerhouse

India’s power and energy sector presents a compelling investment proposition, offering attractive opportunities for both domestic and international players. The government’s supportive policies, coupled with the rising demand for clean energy, create a fertile ground for innovation and growth.

And with the world’s insatiable thirst for fuel and electricity constantly evolving, investing in this dynamic sector could be a strategic move. By understanding the nuances of this dynamic sector, investors can leverage its potential to illuminate their portfolios and contribute to India’s journey towards a brighter, more sustainable future.

However, it can be intimidating to navigate the broad world of power and energy stocks. Nonetheless, mutual funds that have expertly curated baskets of companies poised to capitalize on the ever-shifting currents of this vital industry could be a prudent option.

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Here, we unveil the top 5 mutual funds boasting high allocations to power and energy sector stocks, strategically positioned to harness the potential of this electrifying domain.

#1 – ICICI Pru PSU Equity Fund (Thematic Fund)

Launched in September 2022, ICICI Pru PSU Equity Fund invests predominantly in equity and equity-related securities of Public Sector Undertakings (PSUs). The scheme invests across the market cap, and as of November 2023, it holds 67.27% allocation in large caps, 20.40% allocation in mid-caps and 2.96% in small caps.

Currently, the scheme holds an AUM of Rs 1,625.36 crore and is benchmarked against the NIFTY 50 TRI. Bear in mind that the scheme does not carry a long performance track record; thus, investors may consider their suitability before investing in it.

ICICI Pru PSU Equity Fund – Allocation to Power & Energy Stocks

Data as of November 30, 2023
(Source: ACE MF) 

The scheme holds a maximum exposure of 9.89% in stocks of NTPC Ltd., the business aims at setting up power plants and power generation through its coal-based and gas-based power plants. The Company has also diversified into the construction of hydropower plants and generation of hydropower besides power trading and distribution of electricity.

And 8.41% in Power Grid Corporation Of India Ltd., which is responsible for the transmission of more than 50% of the total power generated in India through its network. Its businesses include power transmission and distribution and energy trading.

The scheme holds fair exposure to other market leaders from the sector, such as – ONGC Ltd. and NHPC Ltd. Currently, the overall exposure to power and energy stocks accounts for 41.41% of the scheme’s assets.

#2 – Templeton India Equity Income Fund (Dividend Yield Fund)

Templeton India Equity Income Fund seeks to provide a combination of regular income and long-term capital appreciation by investing primarily in stocks that have a current or potentially attractive dividend yield, by using a value strategy. The scheme currently has an AUM of Rs 1,704.64 crore and is benchmarked against Nifty 50 – TRI.

Templeton India Equity Income Fund – Allocation to Power & Energy Stocks

Data as of November 30, 2023
(Source: ACE MF) 

The scheme invests across the market cap, and as of November 2023, it holds 50.10% allocation in large caps, 11.66% allocation in mid-caps and 9.61% in small caps.

The scheme holds a maximum allocation of 5.82% in NTPC Ltd. and significant weightage to Power Grid Corporation Of India Ltd., NHPC Ltd., GAIL (India) Ltd. and ONGC Ltd. Currently, the overall exposure to Power & Energy stocks accounts for 31.15% of the scheme’s assets.

#3 – Invesco India Infrastructure Fund (Sectoral Fund)

Launched in 2013, Invesco India Infrastructure Fund invests in a portfolio predominantly constituted of equity and equity-related instruments of infrastructure companies. As of November 2023, the fund holds 40.19% in large caps, 24.93% in mid-cap stocks, and 32.84% in small-cap stocks.

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The scheme holds high allocation to mid and small-cap stocks, investors may consider their suitability before investing in it based on risk tolerance, investment horizon and goals. Due to their inherent volatility, mid and small-cap funds are more sensitive to market fluctuations and require a long investment horizon.

Invesco India Infrastructure Fund – Allocation to Power & Energy Stocks

Data as of November 30, 2023
(Source: ACE MF) 

Invesco India Infrastructure Fund has an overall allocation of 27.07% to Power & Energy stocks. The scheme holds a high exposure of 5.96% and 5.20% to Power Grid Corporation Of India Ltd. and GAIL (India) Ltd.

The fund carries a significant weightage to market leaders from the sector such as – Gujarat State Petronet Ltd., Tata Power Company Ltd., KEI Industries Ltd. and Suzlon Energy Ltd.

#4 Aditya Birla SL PSU Equity Fund (Thematic Fund)

Launched in December 2019, the scheme endeavours to create a diversified portfolio by investing in equity and equity-related Instruments of Public Sector Undertakings (PSUs). The scheme invests across market segments such as – 57.78% allocation into large-cap stocks, 20.40% and 13.56% in mid and small-cap stocks, respectively.

Aditya Birla SL PSU Equity Fund – Allocation to Power & Energy Stocks

Data as of November 30, 2023
(Source: ACE MF) 

The scheme holds an allocation of around 8.90% in NTPC Ltd. The fund also has exposure to leading companies from the power & energy industry with good growth potential.

#5 Nippon India Power & Infra Fund (Thematic Fund)

Nippon India Power & Infra Fund aims to provide long-term capital appreciation by investing in equity/equity-related instruments of the companies that are engaged in power and infrastructure space in India. The scheme holds 50.75% in large caps, 20.11% in mid-caps and 19.96% in small caps as of November 2023.

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

Data as of November 30, 2023
(Source: ACE MF) 

The overall allocation to Power & Energy Stocks is around 23.39%, and there is significant exposure to market leaders from the sector, such as 7.32% to NTPC Ltd, 6.66% to Reliance Industries Ltd., their new energy and new materials business will be an optimal mix of reliable, clean and affordable energy solutions with hydrogen, wind, solar, fuel cells, and batteries. One of the giants from the power & energy sector is Tata Power Company Ltd., the scheme carries a weightage of 2.21%.

Investors may consider taking a plunge into these mutual funds only after thorough market research and assessing their suitability based on risk tolerance, investment horizon and goals.

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The future outlook of the Indian power & energy sector

The Indian power and energy sector is poised for an exciting transformation in the coming years concerning demand growth, energy mix and market operations. Renewable energy sources like solar and wind, are expected to be the primary driver of growth, surpassing coal as the leading source of energy by 2030.

India’s ambitious target of 500 GW renewable capacity by 2030 and net-zero emissions by 2070 underscores this shift. Advancements in solar cell efficiency, storage solutions like batteries, and grid integration technologies will further bolster the cost-competitiveness and reliability of renewables, making them even more attractive.

Existing coal plants will likely focus on improving efficiency and reducing emissions through retrofits and carbon capture technologies. Coal usage is projected to gradually decline as renewable energy expands. However, technological advancements in clean coal technologies may slow down the decline.

By 2031, the Indian government intends to construct 21 new nuclear power reactors with a combined installed capacity of 15,700 MW. According to the Central Electricity Authority (CEA), India’s electricity needs will increase to 817 GW by 2030. Additionally, the CEA projects that by 2029-2030, the generation of renewable energy will rise from 18% to 44% of total energy, while thermal energy is predicted to decline from 78% to 52%.

Overall, the outlook for India’s power and energy sector is positive. The commitment to clean energy, technological advancements, and government initiatives all contribute to a future powered by the sun and wind. However, addressing financing, storage, and skill development challenges is crucial to translate this potential into reality.

This article first appeared on PersonalFN here