Introduction to ESG Mutual Funds
ESG mutual funds come under the category of Thematic Mutual Funds. These funds invest in companies that are socially responsible. Such companies have a certain conscience about the environment, and while investors evaluate them, the aspects of sustainability, best practices, social responsibility and corporate governance are considered. Primarily, ESG funds invest in companies that comply with certain ESG standards and those which target sustainable patterns of growth and development. Therefore, “ESG” is an acronym that stands for “environmental, social and governance”. For some investors, investing is not just about returns, but also about values.
The Best ESG Mutual Funds to Invest In
As of the early part of 2021, approximately $2.96 trillion was globally invested in ESG mutual funds. In the investment of these funds, Europe is in the lead. ESG investments launched in India in 2006, and here are some of the best ESG mutual funds to invest in:
|Fund Name||AUM (in Crores)||Till Date CAGR|
|SBI Magnum Equity ESG Fund||4246.325 Cr||11.6%|
|Quantum India ESG Equity Fund||56.02 Cr||15.6%|
|Quant ESG Equity Fund||77.966 Cr||47%|
|Aditya Birla Sun Life ESG Fund||908.408 Cr||7.7%|
|Axis ESG Equity Fund||1638.029 Cr||14.8%|
Who should invest in ESG mutual funds?
Should you invest in ESG mutual funds? ESG mutual funds are different from other funds in the way that the companies in these, target environmental sustainability and social wellbeing most. Research has found that companies that display a high score on the ESG front have a low cost of capital when compared with other companies. Hence, for investors who want minimal risk and a decent guarantee of profits, ESG mutual funds may be a good bet. Nonetheless, there is not enough data to assess the volatility/risk that investors may have to experience yet. In spite of this, investors who are more environmentally inclined and support social reform and governance, are drawn to ESG mutual funds in a big way. With ESG mutual fund investment, you know you are doing what you can, although indirectly, for a sustainable environment, and not just capitalising on rewards for yourself.
Taxation on ESG Mutual Funds
ESG mutual funds attract the same tax laws as other mutual funds, and equity instruments. Therefore, LTCG, or long-term capital gains will apply to your returns, taxed at 10%, if amounts exceed Rs. 1 lakh and funds are held for longer than a year. Furthermore, ESG mutual funds that you hold for less than one year will be liable for taxation at 15%. Here, an STCG, or short-term capital gain tax will be applied. Whenever either taxation is applied on the returns of ESG mutual funds, you will also be charged a surcharge and cess.
Risks Involved in ESG Mutual Funds
Investments in the class of environmental, social and governance funds have quadrupled in the past few years. The crisis that the world has witnessed has only enhanced investment in this class, making people more aware of selflessness in helping others and the environment around them in general. Given how good all this may sound, there are some obvious risks while investing in ESG mutual funds:
- There is no clear definition of an ESG mutual fund, and fund managers that investors rely on may not be able to make rational decisions of whether companies fall in the ESG class.
- About 40% large-cap stocks represent high ESG scores as well. These may be prone to the same market volatility risks as any other stocks are.
ESG mutual funds are viewed as much less risky than other funds. This is due to the fact that companies that are included in these funds rely on more effective methods to sustain themselves for future growth than other companies.
Return Potential of ESG Mutual Funds
By investing, you can aim for goals that are above mere monetary pursuits. While an investor’s focus is always on achieving the best performance, more and more individuals have a more profound thought process today. If you want to support corporate best practices and environmental protection, then you may have to accept somewhat lower returns from ESG mutual funds. However, this may not always be the case, as several large-cap companies are creating ways to effectively be included in the ESG category.
You may get good returns if you are with your ESG mutual funds for the long haul, as you can with other equity avenues. In fact, many individuals select ESG mutual funds as a core portion of their financial portfolios, with a combination of large, small and mid cap equities. Based on international news, it is reported that funds falling within the Nifty 100 ESG Sector Leader Index performed better than many other large-cap funds.
An ESG Fund’s Compounding Effect with Respect to Time
The funds that include companies that are ESG-compliant have a compounding effect over a period that is much the same as any other mutual fund investment. The only difference between ESG mutual funds and regular mutual funds is that with ESG mutual funds, you get compounding effects that come with a conscience. With ESG mutual funds, you get the most out of the impact of compounding as the value of the fund rises. By staying invested for the long run, you can get returns generated. These take the form of capital gains and are reinvested, thereby creating more profits.
Advantages of ESG Mutual Funds
Here are the key advantages you get from ESG mutual fund investments:
- Low Risk - Companies which are not ESG-compliant may have questionable ways of functioning, leading to poor profits. Such companies, and investments thereof, may not prove fruitful. This is never the case with companies that are part of ESG mutual funds, which are low in risk.
- Low Costs/High Returns - ESG-compliant organisations maintain low costs in their operations. This means higher returns for investors.
- Outperformance in Markets - Companies that form ESG mutual funds frequently outperform their counterparts as they have solid reputations, good profits, a robust market share, and overall positive revenue growth potential.
Reasons to Invest in the Best ESG Mutual Funds
The reasons for investing in ESG mutual funds are three-fold, and are based on the acronym itself, as you can see below:
- Environmental Reasons - Environmental issues are a serious concern. Several major firms have realised that the conservation of resources doesn’t merely translate to keeping our planet beautiful - it also helps to reduce costs. Hence, by keeping costs low, there is more room for profit and greater returns for investors.
- Social Reasons - ESG mutual funds are an ideal investment for investors who share the same values as the companies they invest in. This kind of “impact investing” suits investors that share the same commitment to specific causes.
- Governance Reasons - Companies that combine sustainable and best business practices and incorporate environmental responsibility have special appeal for a niche group of investors, which is only growing. ESG-compliant organisations tend to operate more efficiently and more cost-effectively than firms which are non-compliant..
ESG mutual funds can be immensely rewarding investment instruments. ESG mutual funds help investors to broaden their investment perspective, and think of more than monetary measures to evaluate a company’s success. It can give you the peace of mind of taking lower risks with your capital and, if done right, have a great impact on the protection of the Earth.
- What makes a fund an ESG fund?
ESG funds are mutual funds that invest primarily in companies that follow environmentally sustainable practices and adhere to responsible social governance in their operations.
- Do ESG funds outperform the market?
There is some evidence that ESG mutual funds have outperformed other mutual funds in the market over the past three years.
- What does ESG stand for?
ESG is an acronym that stands for “Environmental, Social and Governance” wherein the term is applied to companies that incorporate best practices related to this in company operations.