Best Energy Sector Mutual Funds to Invest in 2022

Energy sector mutual funds are a variant of thematic equity funds which invest in companies functioning in the energy sector. These funds invest a minimum of 80% of their assets in equity and equity-related instruments of companies in the resources and energy sector in India. 

The portfolios of thematic energy funds are based on investments in companies that operate in natural resources, their production, distribution, development, mining, etc. 

List of Top Performing Energy Sector Mutual Funds in India 

Here is a list of the top energy sector funds you can invest in 2022 as per their 3 year annualised returns or CAGR: 

How Do Energy Sector Mutual Funds Work? 

The energy mutual funds invest at least 80% of their net assets in equity/equity-related instruments of companies in the energy and resources sectors in India. The economic operations of these companies centre around natural resource production, development, discovery, distribution, energy, mining, etc.

These mutual funds tend to be highly volatile but have the potential to provide high returns in the long term as they aim to take advantage of the growth in the energy sector. The fund manager uses his or her expertise and picks the companies to invest in after analysing their track record, growth rate, and overall market situation.  

These funds attempt to maintain a balance between cyclical and non-cyclical businesses. Non-cyclical businesses stay unaffected by market conditions and external factors. Cyclical businesses’ performance is theme-based. A good example of cyclical business can be pesticides and chemicals. The unit price value of energy sector funds can go down if a particular business sector underperforms and vice-versa. 

Segmentation of Energy Sector in India 

Before investing in energy sector mutual funds, you should have an overview of India’s energy sector. The categories of the energy sector in India are as follows:

• Power 

The Power sector in India is substantially diversified. It utilises multiple resources and is trying to incorporate even more. These resources can be divided into two parts – conventional and non-conventional. Some examples of conventional resources are coal, natural gas, oil, etc. Among non-conventional resources, wind, solar energy, and agricultural and domestic waste are common. 

• Oil and gas 

India comes third after China and USA in energy and oil consumption. India is also the largest petroleum products exporter in Asia. India’s economic expansion is closely dependent on the oil and gas sector. Hence, increased demand and price might give the investors of this sector a healthy profit. 

• Mining  

India is the world’s second-largest coal and crude steel producer. It holds a large reserve of coal and metal mines. Moreover, this industry is seeing growth in the export industry. Therefore, investment in this sector might be a good idea with strategic allocations of assets. 

• Iron and steel 

India has the advantage of having an extensive reservoir of iron ore. Moreover, with the continuous advancement of modern technology and improvements, India has entered the global market of iron and steel production, and it might be a good time for investors to join this sector. 

• Chemicals

India comes fourth after the USA, China, and Japan in producing agrochemicals. Also, by 2025, India’s market for chemicals and petrochemicals is expected to exceed 300 billion dollars. Therefore, investors might find this market to be profitable.  

• Renewable energy 

India holds commendable positions when it comes to renewable energy utilisation, especially solar and wind power. The Central Electricity Authority states that renewable energy generation will rise from 18% to 44% by 2029-30. 

Who Should Invest in Energy Sector Funds? 

Energy sector funds can be ideal for you if you want to invest in equity schemes that focus on energy and natural resources. Moreover, energy funds offer good diversification and help balance your portfolio, thanks to its various sub-sectors. 

However, investing in these funds also requires allocation expertise. Moreover, due to high sensitivity to market movements, these funds may also require you to stay invested for an  extended period to reap the maximum benefit. On the other hand, the companies in this sector are well-established companies with a good track record. 

Hence, although there’s a risk factor, these funds are usually invested in stocks of well-established companies. Therefore, it is advised that you only invest in sectoral funds if you can adjust to the associated risk. 

Benefits of Energy Sector Mutual Funds 

If you plan to invest in thematic energy funds, you should have an overview of its perks and drawbacks. 

Here are the advantages of investing in energy sector funds: 

• Diversification

Energy funds invest in firms dealing with discovery, development, production, and distribution of energy resources. They also invest in alternative, renewable, automotive, energy storage, and supporting energy sectors. Hence, you will get to diversify your portfolio significantly. 

• Great potential 

With the growth in the energy sector worldwide and in India, there is a high potential for generating exponential returns from investments made in this sector. India is gradually turning towards renewable and sustainable resources, so there is a broad scope of expansion. Since this sector is highly diversified, you can take advantage of each segment and earn a significant return on your investments. 

• Long term capital appreciation

Equity funds have a high potential to generate long-term gains. Energy funds are purely equity funds that tend to invest in companies having good track records and high growth potential. Investing in such companies for the long term can earn you higher returns. 

• Expert fund management

If you want to invest in energy sector stocks, it can be pretty hectic for you to manage your money as these can be highly volatile. A good alternative is energy mutual funds. With the help of an expert fund manager, you can reap the optimal benefits on your investment. 

Things to Consider While Investing in Energy Sector Funds 

No return or principal appreciation is guaranteed in a mutual fund or stock investments. Before you start investing in energy sector funds, here are the points that you should keep in mind:

• Investment goal

As previously discussed, energy sectors hold high growth potential but can also be highly volatile. Nevertheless, it is a good choice for long-term capital appreciation. Hence, you should consider assessing your investment goals before going ahead with any investment decision. 

• Past performance

No mutual fund can guarantee its future returns depending on its past performance. However, past performance of that fund can give you an abstract idea of what you can expect by investing. Therefore, try to invest in funds that have shown consistent performance for a longer period instead of funds that offer temporary high returns. 

• Asset allocation

Investing in a well-diversified energy sector portfolio is always a wise choice. Doing so will balance your investments and save you from significant losses. If one investment of yours goes downward, the others will balance the whole portfolio. This is mostly based on the fund manager’s expertise and ability. 

Taxation of Energy Sector Funds 

Energy sector funds come under thematic equity funds. Hence, these are taxable as per the same taxation rules of equity funds. Here are the tax implications: 

• If assets are held for less than 12 months, the gains are referred to as short-term capital gains. These are taxed at 15% plus applicable surcharges. 
• For assets that are held for more than 12 months, gains become long-term capital gains and are tax-free if below ₹1 lakh. However, above ₹1 lakh, it is taxable at 10% as per LTCG rules. 

Final Word 

The five major sub-sectors of the energy sector in India – oil & gas, mining, renewable energy, chemicals and metal, are seeing significant growth over the past few years and are expected to see more in upcoming years. Moreover, some of these are expected to expand significantly by the year 2040. Hence, investing in energy sector funds can bring great profits to investors. However, make sure to assess your investment objectives and financial goals before going ahead with any investments. 

FAQs about Energy Sector Funds