ESG Mutual Funds (MFs) play a significant role in implementing sustainable and responsible investing practices. They help in financial growth while enabling you to make a positive impact on the environment and society. 


With a focus on Environmental, Social, and Governance (ESG) practices, these funds help you invest in socially aware companies and businesses.

What are ESG Mutual Funds?

ESG mutual funds invest in companies after reviewing them based on the ESG parameters. As per SEBI regulations, these funds must invest about 80% of their assets in equity and equity-related instruments. However, these instruments must adhere with the ESG theme. 


The regulator has also prevented the remaining 20% from being invested in securities that are in contrast to ESG principles.

How Do ESG Mutual Funds Work?

ESG MFs consist of investments in stocks and bonds of companies that match the set ESG criteria. Like most mutual funds, these funds are professionally managed by fund managers. 


Your returns from these funds depend on the performance of the companies invested in by the managers. While choosing the company, they consider factors like the business model sustainability, greenhouse gas emissions, renewable resources usage, and more. 


Generally, fund managers avoid investing in companies that deal in the production of goods and services that may harm society. These include those manufacturing tobacco products and weapons. 


You can access information pertaining to their fund activities and performance since fund managers need to publicly disclose this data.

Pros of ESG Mutual Funds

Here are some top benefits of investing in ESG mutual funds:

  • High Potential Returns

These funds typically perform better than traditional mutual funds in the long term. Additionally, more companies are becoming ESG-compliant due to stricter norms and social consciousness. 


Both factors combined, these funds have the potential to offer attractive returns while giving you an opportunity to make a positive impact.

  • Risk Mitigation

ESG funds help diversify your investment portfolio by investing in companies that meet ESG norms. These companies typically have a high potential to grow and a low risk of being shut down due to non-compliance with regulations. 


Additionally, ESG funds only choose high-quality stocks that perform positively on ESG metrics. All of this helps diversify your investment and mitigates the risk to secure your financial growth.

  • Long-term Capital Appreciation

ESG funds help in long-term capital appreciation by identifying companies that have growth potential and strong finances. Hence, the potential to earn significant returns while positively impacting society is higher.

Cons of ESG Mutual Funds

Here are the drawbacks of investing in ESG funds.

  • Limited Opportunities

You may have fewer fund options when compared to traditional mutual funds, which may also impact your returns. There are fewer options because these funds focus on companies that meet ESG criteria. 


This may eliminate the opportunity to invest in stocks of companies from specific sectors and industries that generate high returns. 

  • High Investment Costs

In terms of costs associated with ESG mutual funds, their expense ratio is higher than traditional funds. Here, expense ratio is the cost of managing the fund. 


This is because investing in these funds needs additional research to evaluate the ESG compliance of various companies. Higher investment costs can reduce your overall returns.

Things to Consider Before Investing in ESG Mutual Funds

Investing is an important decision that demands caution. Here are some key points to consider before investing in ESG funds.

  • Investment Period

ESG funds typically come with a long-term investment period to generate high returns since they include equity schemes. Due to this, these funds may be more volatile in the short term. So, invest in these funds if you plan to stay invested for a longer duration.

  • Historic Performance

Before investing in ESG funds, consider their historic performance and compare them with similar funds. Mutual funds with a record of consistently good returns can prove to be good investment options. 


Such metrics will help you assess your potential returns and make a well-informed decision. 

  • Asset Allocation

The choices of companies are limited for these schemes since they choose only those companies that follow ESG norms. Typically, these funds include large-cap companies. 


However, the fund manager can choose mid-cap and small-cap companies as well. So, choose funds whose asset allocation is well-diversified since it can help mitigate the risk. 

  • Taxation

ESG funds follow the taxation rules of equity mutual funds. If the holding period is less than 1 year, the returns are considered Short-term Capital Gains (STCG) and are taxed at 15%. 


Conversely, if the holding period is more than 1 year, they are considered as Long-term Capital Gains (LTCG), which are taxed at 10%.

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Who Should Invest in ESG Mutual Funds?

Consider investing in ESG mutual funds if you prioritise ethical investing. This is because the main parameter for choosing stocks in these schemes is sustainability and social responsibility. 


The fund manager considers the financial performance of companies and checks whether they meet the ESG criteria. So, these funds are ideal for a long investment horizon and can be risky in the short term. 

Today, you can easily choose from a range of ESG MFs. Assess your requirements and check if they align with the fund before investing. On Bajaj Markets, browse different types of mutual funds and diversify your investment portfolio. Quickly compare various funds before choosing one that meets your needs.

FAQs on ESG Mutual Funds

How can I invest in ESG MF?

You can invest in ESG funds by visiting online platforms that offer them or through a broker dealing in ESG funds.

Why are ESG MFs becoming popular as an investment?

These funds are gaining popularity since companies that support ESG practices perform well in the long run. Nowadays, investors are considering the environmental and social impact of their investments.

Do ESG investments provide returns to shareholders?

Yes, these mutual funds provide returns to shareholders while supporting environmental and social responsibility.

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