Best ESG Mutual Funds in India (2026)

Best ESG mutual funds - compare & view by rank

Returns are for direct plan mutual funds. Sorted by INDmoney rank. How INDmoney rank works →

What Are ESG Mutual Funds and How Do They Work?

ESG mutual funds invest in companies that meet certain environmental, social, and governance standards.

These funds evaluate companies based on factors such as:

• environmental impact and resource usage
• employee welfare and workplace practices
• board structure and corporate governance standards

Companies that do not meet the fund’s ESG criteria may be excluded from the portfolio.

SEBI classifies ESG funds as thematic equity mutual funds and has issued disclosure guidelines to improve transparency and reduce the risk of misleading sustainability claims.

Because ESG screening limits the number of eligible companies, portfolio composition may differ significantly between ESG funds depending on the evaluation framework used.

Returns are market-linked and not guaranteed.

SEBI's Classification Rule for ESG Mutual Funds

SEBI classifies ESG funds under the Thematic mutual fund category.

Key rules include:

• Minimum 80% of assets must be invested according to the fund’s ESG investment strategy
• The ESG methodology and screening framework must be disclosed in the Scheme Information Document (SID)
• Funds must clearly explain their ESG evaluation criteria and exclusions
• Each asset management company (AMC) can offer only one ESG scheme

These rules aim to ensure transparency and reduce the risk of greenwashing, where funds claim to follow sustainability principles without clearly defined criteria.

How Do ESG Mutual Funds Generate Returns?

ESG mutual funds generate returns through investments in companies that meet ESG standards.

1. Quality-focused stock selection

Companies with strong governance and sustainability practices may have lower regulatory and reputational risks, which can support long-term business stability.

2. Long-term capital appreciation

Returns primarily come from the growth in earnings and stock prices of companies included in the portfolio.

3. Investor demand for ESG investments

As global investors increasingly consider sustainability factors, companies with strong ESG profiles may attract more investment.

4. Dividends

Many ESG-compliant companies distribute dividends, which can contribute to investor returns.

Because ESG screening reduces the number of eligible companies, the portfolio may differ from broader market indices.

Who Should Invest in ESG Mutual Funds?

ESG mutual funds may be suitable for:

• Investors who want their investments to align with environmental, social, and governance principles
• Long-term investors who believe companies with strong governance and sustainability practices may deliver durable growth
• Investors seeking exposure to companies that follow responsible business practices
• Investors with a long-term investment horizon of 5 years or more

They may not be suitable for:

• Investors seeking maximum exposure to the entire equity market
• Investors focused on short-term returns
• Investors who prefer traditional diversified equity funds without screening criteria

Advantages of ESG Mutual Funds

ESG mutual funds offer several potential benefits.

• Responsible investing approach

These funds allow investors to consider environmental and social factors alongside financial performance.

• Focus on governance and transparency

Companies with strong governance practices may have lower risks related to fraud, regulatory penalties, or management issues.

• Growing global investment trend

Institutional investors and global markets are increasingly incorporating ESG considerations into investment decisions.

• Long-term sustainability focus

Companies with responsible environmental and social practices may be better positioned for long-term regulatory and societal changes.

Risks of ESG Mutual Funds

Despite their potential benefits, ESG funds also carry certain risks.

• Limited investment universe

Screening companies based on ESG criteria may reduce the number of eligible stocks.

• Variation in ESG methodologies

Different funds may use different ESG scoring frameworks, which can lead to significant differences in portfolio composition.

• Sector concentration

Some sectors may dominate ESG portfolios depending on the screening process.

• Market risk

Like all equity mutual funds, ESG fund returns depend on stock market performance and may fluctuate.

Investors should evaluate their financial goals, risk tolerance, and investment horizon before investing.