Energy mutual funds: Meaning, top 5 funds, key factors, advantages and risks explained

Energy mutual funds provide exposure to companies across the energy value chain, including oil & gas, power utilities, energy infrastructure, and clean energy.

So, let's understand the meaning of energy mutual funds, factors to consider, the top 5 funds, and the pros and cons of investing in them.

What are energy mutual funds?

Energy funds are thematic equity schemes that invest primarily in companies in the energy sector. These funds invest in oil & gas exploration, refining, power generation and distribution, coal mining, renewable energy, energy equipment, financing, and supporting businesses such as steel and cement.

As per SEBI regulations, thematic funds must invest at least 80% of their assets in the theme they follow. In this case, the theme is energy and related sectors.

Factors to consider while investing in energy funds

• Sector allocation: Some funds are heavily tilted towards conventional energy companies, while others diversify into materials, industrials, or renewable energy. Hence, it is important to check the sector-wise allocation before investing in an energy fund.
• Top holdings: Reviewing the fund's top 5 or 10 holdings can provide insight into where returns and risks are likely to come from.
• Performance metrics: You can assess measures such as alpha, which indicates excess returns over a benchmark, and beta, which reflects the fund's sensitivity to market movements.
• Expense ratio: Comparing fund costs is important, as higher expenses can reduce net returns over the long term.

Top 5 energy thematic funds by AUM

Although all five schemes are classified as energy-thematic funds, their portfolios vary considerably.

SBI Energy Opportunities Fund and ICICI Prudential Energy Opportunities Fund are primarily concentrated in energy and utility companies, with holdings such as Reliance Industries, ONGC, NTPC, and Gujarat Gas.

DSP Natural Resources and New Energy Fund takes a broader approach by combining energy exposure with materials stocks and international investments through the BlackRock World Energy Fund.

Tata Resources & Energy Fund is more tilted towards materials, with major holdings in cement and steel companies. At the same time, the Baroda BNP Paribas Energy Opportunities Fund remains focused on conventional energy and utility businesses.

As a result, despite belonging to the same category, these funds offer different levels of exposure to energy, materials, and utilities businesses.

Advantages of energy funds

• Chance to invest in a vital sector: Energy remains central to economic growth, industrial activity, and infrastructure development. The energy funds directly offer the opportunity to invest in this important sector in a diversified manner.
• Professional management: Fund managers actively track developments across the energy ecosystem and allocate investments accordingly.
• Opportunity to benefit from the energy transition: Rising investments in renewable energy, transmission networks, and cleaner technologies could create long-term growth opportunities for energy companies and related funds.

Risks in energy funds

• Dependence on a single sector: Unlike diversified equity funds, energy funds are closely tied to the performance of one sector.
• Cyclical nature: The energy sector goes through periods of growth and slowdown, while fluctuations in oil, gas, coal, and other commodity prices can affect the underlying stock's performance.
• Policy and regulatory challenges: Changes in regulations, environmental norms, subsidies, tariffs, or pricing policies can impact the prospects of energy-related businesses.

Disclaimer: This is purely for educational/ informational purposes and should not be taken as any investment advice. Always consult a SEBI-registered advisor before making any investment decisions.