Should you invest in ICICI Prudential Energy Opportunities Fund? A Moneycontrol review

02/07/2024

ICICI Prudential Mutual Fund, the second-biggest asset management company (AMC), has launched an open-ended equity scheme that will predominantly invest in the energy theme.

The new fund offer (NFO) for ICICI Prudential Energy Opportunities Fund opened on July 2.

What is on offer?

This scheme will invest predominantly in equity companies engaged in or benefiting from the growth in traditional and new energy industries/sectors as well as allied businesses.

The energy theme encompasses a wide range of industries, such as oil & gas, bio-energy value chain, and lubricants. The scheme will have the flexibility to invest across energy value chains.

The investment universe of the scheme involves power ancillaries, oil value chain, green energy, gas value chain and power value chain. The scheme will focus on both conventional and green energy companies.

ICICI Prudential Energy Opportunities Fund will also look to invest in overseas energy companies, provided there is room available for overseas investments by the mutual fund industry.

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The scheme will be managed by Sankaran Naren and Nitya Mishra, and the benchmark for the scheme will be Nifty Energy Total Return Index (TRI).

What works?

Energy is the cornerstone of industrial growth and economic development. With the ongoing transition towards renewable energy and the government's focus on achieving net-zero emissions, the energy theme offers significant growth potential.

Further, the government reforms in the energy sector and the ‘net zero’ policy by 2070 bode well for the sector.

India's 'net zero' target by 2070 would require a massive push for renewables, which is likely to open up opportunities for existing and new players in the energy value chain.

“The Energy Opportunities Fund has good potential as there are positive near-term triggers, such as power shortage, while in terms of long-term potential, the energy theme and the GDP growth will grow in tandem. As India grows over the next 30 years, we will require more power and fuel energy, which can be in the form of clean energy or conventional energy. Thus, it’s a permanent growth theme as long as you believe in the India growth story,” said S Naren, Executive Director and Chief Investment Officer, ICICI Prudential AMC.

“Although the Nifty Energy Index has outperformed the broader market recently, the valuations remain reasonable, and investors may consider this scheme from a long-term perspective,” added Naren.

What doesn’t work

With the market at all-time highs and equity valuations pricey, there is a higher risk of underperformance by thematic funds.

Data shows that while the Nifty Energy Index has beaten the broader S&P BSE 500 TRI over the past five years, the energy index underperformed the broader markets in the previous five years.

Thematic funds focus on investing in specific themes, sectors, or trends rather than broad market indices. While they can offer attractive returns if the theme performs well, they also carry several risks, such as concentration risk, market timing risk, sector-specific risks and regulatory and political risks.

Also, in terms of options available, energy, as a standalone theme, is largely an unexplored fund category. SBI Energy Opportunities Fund was launched earlier this year, while there are two more funds based on this theme -- DSP Natural Resources and New Energy Fund and Tata Resources & Energy Fund.

What should investors do?

While commenting on the fund, Kirtan Shah, founder and CEO of Credence Wealth Advisors LLP, said: “When you talk about energy, there are lot of moving parts. The world may or may not transition to a type of energy that we are expecting it to adopt. This sector is also largely going to be influenced by government policies. Also, it is going to be an import-driven business for a long time till manufacturing really sets up.”

For experienced investors, if you choose to invest in thematic funds like ICICI Prudential Energy Opportunities Fund, they should not form the core of your portfolio.

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Instead, they can represent a small, riskier portion of your overall portfolio, suitable for tactical allocation by experienced investors who are aware of the higher risks involved.

Diversified equity funds also offer exposure to various sectors or themes. Wait for this fund to show a sustainable track record before you put money.

The NFO will close on July 16.

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