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Best Thematic Energy Mutual Funds

Updated on :  

08 min read.

Best Thematic energy funds are a class of equity funds whose asset allocation is made mostly towards companies operating in the energy sector. We have covered the following in this article on the best thematic energy mutual funds:

Introduction to Thematic Energy Mutual Funds

The portfolio of thematic energy funds is dominated by equities of companies whose economic activities revolve around production, development, discovery, and distribution of natural resources, energy, mining, and so on. Investing in these funds gives you exposure to a portfolio consisting of top-performing equity-linked securities of this sector.

Top Thematic Energy Mutual Funds

The table below shows the top-performing thematic energy mutual funds based on the past 3-year and 5-year returns:

Mutual fund 5 Yr. Returns 3 Yr. Returns Min. Investment Rating

Who Should Invest in Thematic Energy Mutual Funds?

Since these funds concentrate their portfolio with equities of companies operating in the energy sector, they carry a high risk of concentration. Therefore, investing in thematic energy funds is suitable for those who are willing to bear higher levels of risk. Risk-averse investors may not consider these funds.

There is no second thought about the fund’s performance when the energy sector is doing well. It is also worthwhile noting that the losses can be magnified when the underlying sector is not performing as expected. Aggressive investors may consider investing up to 10% of their portfolio in energy funds.

Taxation of Thematic Energy Funds

The dividends offered by all mutual fund schemes are added to the investors’ overall income and taxed at their income tax slab rate. This is referred to as the classical way of taxing dividends in the hands of investors. Previously, dividends were tax-free in the hand of investors as fund houses paid dividends distribution tax (DDT).

Capital gains realised on selling fund units within a holding period of one year are referred to as short-term capital gains. These gains attract tax at the rate of 15%. Capital gains realised on redeeming your units after a holding period of one year are considered long-term capital gains. These gains of up to Rs 1 lakh a year are tax-free. Any gain above this limit attracts a tax at 10%, and there is no benefit of indexation provided.

Risks Associated With Thematic Energy Funds

Thematic energy funds invest heavily in equities of energy sector companies. Therefore, they carry a higher risk of concentration. The only way of mitigating this risk is by staying invested for a long period of time. If your investment horizon is shorter than five years, then you may not consider investing in these funds. Apart from a high risk of concentration, these funds are also associated with market and volatility risks. Market risk is the possibility of the value of your investments going down due to the adverse market developments. Volatility risk is the possibility of the worth of your investments dropping due to a sudden change in the price of the underlying assets.

Things to Consider Before Investing in Thematic Energy Funds

You have to consider the following before investing in a thematic energy fund:

  • i) Risk profile If you are a risk-averse investor, then investing in these funds may not be apt for you as they come with higher levels of concentration risk. These funds are suitable for those willing to bear higher levels of risk.
  • ii) Investment horizon You may consider investing in these funds only if your investment horizon is longer than five years. By having an extended investment horizon, you give your investments much needed time to go through market and business cycles and offer stable returns in the long run.

Advantages of Thematic Energy Funds

You get the following advantages by investing in thematic energy funds:

  • The potential to beat broad benchmarks when the energy sector is doing well.
  • You get exposure to a portfolio consisting of top-performing securities of companies operating in the energy sector.
  • These funds are an excellent investment option to realise long-term financial goals.