Are ESG funds right fit for you?

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In several countries, funds invest in companies that perform well on the environmental, social and governance (ESG) parameters. This concept is quite new in in India. Most of the ESG funds here have only been launched only in the last 2-3 years. Previoulsy called the thematic funds, Sebi has now approved them as EGS funds. Asset allocation of ESG funds is mainly based on bonds and shares selected on the basis of environmental, social welfare, and corporate governance of companies.

So what kind of returns can be expected from ESG funds? There is not enough data available on the returns of ESG funds as most of these funds were launched in 2020. According to Value Research, these funds have given an average return of -2.4% in the past year, 23% in the past 3 years, and 12% in the past 5 years.

Should you invest? Keep in mind that ESG mutual funds, like other thematic funds, can be quite volatile. They typically have around 80% equity investments, so it’s clear that they carry a considerable amount of market risk.

The holdings of most such funds include shares in banking, financial services, information technology, and consumer staples (such as food, beverages, and personal hygiene products). Experts say that you can get exposure to such shares from other categories of equity mutual funds as well.

ESG funds have been launched in recent years in India. Therefore, their track record is not very attractive. Looking at the one-year return, most funds have not performed well.

If an investor is interested in the ESG concept and believes that companies of this type will grow in the future, they should invest in such products. However, if an investor is unfamiliar with the risks associated with such funds, they should first try to understand this concept well and then invest. If you are still confused about it, you can consult your financial advisor.