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ESG funds: The future of Investing

by Tereso P Jerry

What is ESG?

Environmental, social and governance are the three pillars of every ESG analysis. These three parameters might help an individual invest in a sustainable fund. ESG investing is a parameter-based approach to evaluate and filter companies based on their responsibilities towards positive environmental, social and governance (ESG) business practices. ESG rudiments might provoke investors to integrate non-financial, but useful info into their investment approach.ESG funds usually filter companies with a more holistic strategy and do not restrict their valuation to the business and economic standards of a company. ESG expertscontend that companies that assimilate ESG values have the potential to improve the reputation and benevolence of that company.

An ESG fund must invest in securities and bonds of companies that have integrated environmental, social and governance ethics in their business.  An ESG fund must filter through these three important parameters while picking stocks for investment purpose. Today’s investor isn’t just behind capital appreciation. These days, there are socially responsible investors who are focusing on incorporating ESG into their investment strategy. They are avoiding stocks that promote or associate themselves with environmental unfriendly activities or are deemed harmful from a societal perspective, for example, exclusion of tobacco, liquor, defence stocks, etc. To create a sustainable investment space more and more AMCs are coming up with ESG funds as a solution to responsible investing.

Start a SIP in ESG fund

If you have a long term investment horizon or are planning to target your life’s long term financial goals through investments in ESG schemes, you can consider starting a SIP in ESG fund. Systematic Investment Plan is an easy and hassle free way to invest in mutual funds. Today, most investors prefer investing in mutual funds via SIP instead of making a lumpsum investment, especially if they are investing in equity oriented schemes like ESG funds.

With SIP, all an investor has to do is decide on the monthly SIP amount and complete all the pre-investment formalities with the fund house. Following this, every month on a fixed date a predetermined amount will be debited from the investor’s savings account and electronically transferred to ESG fund. Investors will be allotted units in quantum with the investment amount and depending on the fund’s existing NAV (net asset value.)

If you keep a long term investment horizon and continue investing in ESG funds via SIP, your investments might compound and help you achieve a decent corpus. That’s because SIP investments tend to benefit from the power of compounding. In mutual funds, compounding refers to the interest earned on the interest earned from the initial investment amount. Once you allow reinvestment of the capital gains, these gains start earning interest of their own. However, one can only benefit from compounding if the have an investment horizon of at least 7 to 10 years.

SIP investments are known to inculcate the discipline of regular investing. ESG funds are the future of investing and if you want to make sure that you are not just investing for capital gains, but for a sustainable future then you can consider starting a SIP in ESG funds. However, retail investors are expected to determine their risk appetite before investing in ESG schemes. Investments in ESG funds do not guarantee capital appreciation. You may even have to face losses in volatile markets. If you are new to mutual funds or investing in general, talk to your financial advisor before investing. Also, make a list of goals that you want to achieve and then make an investment plan accordingly. It might help you take a wise investment decision.