Every mutual fund scheme has one priority and that is to beat its underlying index and create long term wealth. Mutual funds invest across market capitalization in companies belonging to different sectors and industries. However, ESG funds are very particular about which companies they choose for picking stocks. ESG stands for environmental, social and governance. These are the three parameters which ESG fund managers thoroughly evaluate and ensure all companies are ESG compliant. An ESG fund generally avoids companies that are directly or indirectly related to the production or sale of liquor, tobacco etc. Companies with large carbon footprints are generally avoided by ESG funds. The who purpose of ESG funds is to invest in a sustainable future. Here, wealth creation is not the only priority. ESG funds are here to create a change and change how individuals perceive mutual fund investments.
Environment is not the only factor that drives ESG funds. Due to poor corporate governance, Indian companies have gone bankrupt in the past. This has even led to investors losing out of on wealth creation. Companies with poor governance are often found embroiled in scandals pertaining to quality issues, manufacturing defects, sweatshops, adulteration in medicines, harmful chemical producing factories etc. ESG funds avoid such company stocks.
Target your life’s long term financial goals
ESG funds are equity schemes which can prove to be highly volatile over the short term. However, these funds do hold the potential to offer capital appreciation over the long term. Historically, ESG funds have offered better returns than conservative schemes. By investing in socially responsible mutual funds like ESG funds, investors can target their life’s long term financial goals like buying a weekend home, going on a world tour with their spouse, or securing their child’s financial future, etc.
Become a socially responsible investor
Investors are now becoming more and more aware about socially responsible investing and now changing their perception towards investing and wealth creation. Those who are increasingly gaining consciousness about protecting their environment, they do not need to protest outside factories emitting toxic substances. They can join the revolution by choosing ESG funds. ESG funds assure investors that they are not just investing keeping wealth creation in mind but are investing for a better sustainable future. We want our future generation to be able to have a better future and by investing in ESG funds we are doing our bit.
Diversify your mutual fund portfolio
A mutual fund portfolio must be well-diversified depending on investor’s risk appetite. Ideally, one must have an 80:20 equity to debt ratio while building a mutual fund portfolio. However, the ratio of asset diversification may vary depending from investor to investor. If you have a debt heavy portfolio, you can consider adding ESG funds to invest in a sustainable future.ESG funds reflect on your point of view that you care about protecting the environment and you can diversify your mutual fund portfolio by investing in them.
Consider starting a monthly SIP in ESG funds
If you wish to invest in ESG funds for the long run, consider starting a monthly SIP. Systematic Investment Plan is an investment tool for ensuring that investors invest small fixed amounts at regular intervals. You can continue investing in ESG funds via SIP till your investment objective is achieved. Investors can also refer to SIP calculator, a free online tool accessible to everyone where they can get a rough estimate on the capital gains which they might earn at the end of their investment journey.
ESG funds are high volatile schemes that do not guarantee returns. If you are new to mutual funds, do seek professional consultation before investing.