Energy Sector Mutual Funds

How do Energy Sector Mutual Funds work?

Energy Sector Mutual Funds work by pooling money from various investors to build a diversified portfolio of energy-related stocks. A professional fund manager researches and selects these stocks based on the fund's specific investment objective.

The fund manager actively tracks industry trends, government policies, commodity prices, and global energy demands to make informed investment decisions. The goal is to generate returns by capturing the growth potential of the energy sector.

Should I Invest in Energy Sector Mutual Funds?

Investing in Energy Sector Funds is suitable for investors with a high-risk appetite and a long-term investment horizon. These funds are ideal if you have a strong conviction in the growth potential of India's energy industry, including both traditional and renewable sources.

However, as thematic funds, they carry concentration risk, meaning their performance is heavily tied to the fortunes of a single sector. It's advisable to allocate only a small portion of your overall portfolio to such funds after investing in core diversified equity funds.

How to Choose the Best Energy Sector Mutual Fund for my Portfolio?

Choosing the right Energy Sector Fund requires careful consideration of several factors. Start by examining the fund's investment strategy to see if it aligns with your goals—for instance, does it focus more on traditional energy or renewables?

Next, review the fund's expense ratio, as lower costs can improve your long-term returns. Also, check the fund's AUM (Assets Under Management) and the track record of the fund manager. Finally, analyse its portfolio to understand its top holdings and sub-sector allocation.

Benefits Energy-sector Mutual Fund

Growth Potential: The energy sector is fundamental to economic growth and is currently undergoing a massive transformation towards cleaner energy. This creates significant long-term growth opportunities that investors can tap into through these funds.

Professional Management: The energy sector is complex and can be influenced by many factors, including global politics, commodity price fluctuations, and regulatory changes. Expert fund managers can navigate these complexities to identify promising investment opportunities.

Diversification: While concentrated in one sector, these funds offer diversification across various sub-sectors. A single fund can hold investments in oil and gas producers, power generation companies, transmission utilities, and renewable energy firms, spreading risk within the theme.

Difference between Energy Sector Funds and Diversified Equity Funds

The main difference lies in their portfolio concentration. Energy Sector Funds invest exclusively in companies within the energy industry, making them high-risk, high-return thematic investments. Their performance is directly linked to the health of this one sector.

Diversified equity funds, like large-cap or flexi-cap funds, spread their investments across various sectors such as banking, IT, healthcare, and consumer goods. This diversification makes them less volatile and a more stable choice for core portfolio holdings.

How much Tax do I have to pay on Energy-Sector Mutual Funds?

Energy Sector Mutual Funds are taxed like any other equity fund. If you sell your units within one year of purchase, the gains are considered Short-Term Capital Gains (STCG) and are taxed at a flat rate of 15%.

If you hold your units for more than one year, the gains are considered Long-Term Capital Gains (LTCG). LTCG up to ₹1 lakh in a financial year is tax-free. Any gain above this limit is taxed at 10% without the benefit of indexation.

Market Insights & Fund Activity

How is the AUM of Energy Sector Mutual Funds Growing?

Investor interest in the energy sector is on the rise. In the last six months, funds in this category have seen significant inflows, with ICICI Prudential Energy Opportunities Fund Direct Growth leading the pack by adding over ₹703 crore to its AUM.

Stocks Added by Best Energy Sector Mutual Funds

Over the past six months, fund managers in the energy space have shown strong interest in power and engineering stocks. NHPC Ltd. has been a popular choice, with 3 funds adding it to their portfolios, while others like GE Vernova T&D India Ltd and Siemens Ltd were also added by multiple funds.

Top Exits from Energy Sector Mutual Funds

In the last six months, some fund managers have adjusted their holdings, indicating a shift in strategy. Notably, Hindustan Petroleum Corporation Ltd was exited by one of the funds in this category, reflecting a more cautious stance on the stock amidst changing market dynamics.

Energy Sector Funds' Sector allocation

While focused on energy, these funds often diversify into related sectors to manage risk and capture opportunities. Over the last six months, there has been a noticeable increase in allocation towards the Utilities, Industrial, and Financial Services sectors. Conversely, allocation to pure-play Energy and Tech stocks has seen a slight decrease.