Can energy-focused mutual funds power up your investment portfolio?

India’s energy sector is expected to scale new heights as the country is vigorously meeting its rising energy demands along with its sustainability goals. Mutual fund houses have taken cognisance of this and started leveraging the opportunity by launching funds focussed on the power sector — either exclusively or in combination with infrastructure, natural resources, and other investment themes.

Currently, the assets under management (AUM) of dedicated energy funds is roughly Rs 20,000-30,000 crore. In addition, infrastructure funds with exposure to energy companies are estimated to have an AUM of Rs 30,000 crore.

These funds invest a minimum of 80 percent in companies focussed on traditional energy sources  — oil, gas,  coal,  — or clean technologies such as green hydrogen, solar, wind, etc, and provide an opportunity to participate in India’s evolving energy landscape.

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The attempt here is to make  investors understand the prospects of the energy sector so that they may make informed decisions. One can have an idea about the growth of the power sector by comparing the energy index with various thematic and benchmark indices.

The Indian energy scenario

Understanding the context of this theme is important. India’s energy sector has been transformed from power-deficient to power-sufficient. As of September 2024, India's power generation capacity stood at 453 GW, with fossil fuels (coal, oil, and natural gas) accounting for 53.6 percent of the output. In 2023, fossil fuels met about 84 percent of India’s energy demand, while the rest was met by renewable sources (hydro, solar, wind, bioenergy). The nation has 156 GW (66 percent of which is clean) under construction and will require an additional 469 GW by 2031-32 to meet future demand. Per NITI Aayog estimates, India’s energy needs are expected to grow 2-2.5 times by 2047.

Goals ahead: Panchamrit strategy and net-zero commitments

India’s energy sector is driven by  its Panchamrit strategy. By 2030, this aims to meet at least 50 percent of the power demand from renewable  sources; reduce CO2 emissions by a billion tonnes; and reduce carbon intensity by 45 percent over 2005 levels, thus paving the way for net-zero emissions by 2070.

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These commitments represent significant steps that need  to be undertaken to make the challenging transition from fossil to non-fossil fuels.

Policy reforms

The Indian government is implementing various reforms to support both the traditional and new energy sectors, and also to  enable the transition.

Traditional fuels

Traditionally, coal and oil have been India’s primary sources of energy, essential for businesses and consumers, which sees  new electricity connections for 50 million citizens each year. Notable changes, however, have been seen in the composition of the electricity sector due to phasing in of renewables. While it is challenging to completely reduce reliance on traditional sources, initiatives such as the clean coal mission, coal gasification, and advanced coal power technologies are being considered to minimise emissions. Further, favourable exploration and production policies have been announced to encourage domestic production. Significant reforms are also underway in power transmission and distribution.

Thus, the traditional sector is still relevant, even as the industry is  undergoing a transformation, where many traditional energy companies have entered the renewable arena.

Renewable energy

Considerable progress has been witnessed in the renewable domain. Solar and wind projects now comprise nearly 40 percent of India’s total installed capacity. Solar capacity alone has increased 25 fold between 2014 and 2023, and the PM Surya Ghar Yojana, launched in 2024 with a budget of Rs 75,000 crore, is set to accelerate this further. As of April 2024, India's solar capacity had reached 90 GW. The country is also investing in offshore wind energy to harvest its 7,600 km long coastline.

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A game changer in the clean power space, green hydrogen (the only byproduct of which is water vapour) is produced through electrolysis using renewable energy. To support this technology which will help India achieve its net zero Goal by 2070, the government has introduced the Strategic Intervention for Green Hydrogen Transition (SIGHT) scheme, offering financial incentives for electrolyser manufacturing and hydrogen production. With an initial outlay of Rs. 20,000 crore, the scheme has already attracted companies  actively working in this area.

Likewise, the government has launched a Production Linked Incentive (PLI) scheme and the PM Suryodaya Yojana to drive solar and hydrogen production.

Nuclear power

Nuclear power could be another game changer for the power sector. The country currently has several nuclear reactors under construction, which can potentially add to its low-carbon energy mix.

Key considerations for investors

India’s growing energy demand driven by urbanisation, industrial growth, technology adoption, etc, makes the energy sector a potential investment theme. However, investors must be mindful of regulatory changes, risk-factors, evolving technologies, and market dynamics before committing their monies.

Energy-focussed mutual fund schemes are typically suitable for investors seeking long-term wealth creation. Perhaps the systematic investment route can be explored to even out volatility in returns. Investors should consult their advisers, and be patient in order to capitalise on the potential growth trajectory.

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