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Why You Should Start Investing Today: 4 Benefits of ESG Funds

There are numerous options available in the market when it comes to mutual funds that you can explore and add to your investment portfolio. One such option is ESG funds, which offer potential benefits in terms of diversification, liquidity, and sustainability. The impact of investing in ESG mutual funds revolves around factors related to the environment, social responsibility, and corporate governance.  

Despite ESG mutual funds being present in India for some years now, investment in these companies is still in its early stages, with only a few asset management companies (AMCs) offering such schemes. However, ESG mutual funds have a promising future and are gaining popularity.   

Outlined below are several key factors that emphasize the importance of investing in ESG funds in India. 

  1. Risk Reduction: Companies that prioritize strong ESG practices are likely to have better risk management strategies concerning environmental and social issues. Consequently, they may experience lower exposure to potential legal, regulatory, and reputational risks. 
  2. Potential for Long-Term Returns: ESG funds have demonstrated robust long-term performance, indicating that companies with strong ESG practices are well-equipped to navigate risks and seize opportunities. 
  3. Growing Demand: The demand for ESG investments is rapidly increasing globally, including in India. This surge in demand is expected to drive up the value of ESG funds in the future as more investors seek to align their investments with their personal values. 
  4. Alignment with Personal Values: Investing in ESG funds allows individuals to align their investments with their personal values and beliefs. This empowers them to support companies that make positive environmental and social impacts. 

Suitable Investors for ESG Funds  

While ESG funds in India are still developing certain types of investors may consider including them in their portfolios. These include: 

  1. Investors who are knowledgeable about the benefits and drawbacks of ESG funds. 
  2. Investors with a higher risk appetite. 
  3. Investors seeking long-term investment opportunities. 

Challenges Faced by ESG Investments in India  

ESG investments currently encounter various challenges in India, as outlined below: 

  • Limited Availability of Reliable Data: Obtaining accurate and comprehensive data regarding a company's social, environmental, and governance performance can be challenging. Investors often rely on analysts, fund managers, sustainability reports, annual reports, news articles, and media releases. However, the credibility of available information remains a hindrance to the growth of ESG investments in India. 
  • Lack of Measurement Standards: The Indian market lacks standardized approaches to ESG investing. Various terms, such as impact investing, sustainable investing, socially responsible investing, and responsible investing, are used interchangeably. Standardization in data collection, measurement standards, and reporting methodologies is necessary to foster further growth in this field. 
  • Traditional Mindset: Some investors and fund managers perceive ESG investing as an unnecessary expense. This mindset hampers the growth of ESG investments in India. 
  • Limited Track Record: ESG funds have only recently emerged in India, resulting in a lack of extensive track records. This factor may deter some investors from exploring this investment option. 
  • Lack of Awareness: While ESG investing is gradually gaining popularity among investors, there is still a lack of awareness among many individuals. Increasing awareness about the benefits of ESG investing is crucial for expanding the market and its potential. 

In the current landscape, ESG parameters have become relevant for all businesses, as companies recognize their significance. The demand for greater transparency from investors, shareholders, employees, clients, and regulators is driving the need for ESG investing. It has now become an essential aspect of the business world, particularly in the era of the "new normal." ESG investing is expected to have a substantial impact and transform business practices in India and globally. Ultimately, this shift will benefit the business community and society as a whole. 

 

Disclaimer: Mutual Funds are subject to market risks. Read all scheme related documents carefully before investing.   

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