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How different are ESG funds from multi-cap funds and should you invest in them?

Stocks of ESG fund portfolios are a subset of the multi-cap universe. So until the ESG theme evolves in India, one should focus on multi-cap funds, opines Ashutosh Gupta

Should ESG funds form a part of the equity portfolio? How are they different from multi-cap or large-cap funds?
- N M Rajugopal Shreedhar

Well, let me talk a bit about the ESG concept, which as a theme is gaining traction fast. ESG stands for Environmental, Social and Corporate Governance factors. Now, it is widely understood and acknowledged that companies that score high on these parameters tend to outperform the broader markets. They tend to have a lower cost of capital, better operational efficiency and there is lesser possibility of any regulatory or societal backlash. Now, all these factors reflect favourably in their stock price appreciation.

I don't have very precise numbers on this, but globally, it is a widely accepted and acknowledged investment theme already. Thousands of funds focused on the ESG theme are managing several trillion dollars of money. Even in India, this theme is gaining momentum. Several AMCs have already launched their individual ESG funds or are in the process of doing so.

Now, when it comes to comparing these funds with multi-caps, I would say that the latter have a broader investment mandate and a broader universe of stocks to build their portfolio from. On the other hand, ESG would essentially be a subset of the stock universe that a multi-cap fund would have, limited to only those stocks that score high or meet the threshold criteria on ESG parameters.

We did a preliminary study based on the four-five ESG funds whose portfolios are available at the moment and our preliminary findings suggest that about 20-30 per cent of the portfolios of multi-cap funds are already invested in those stocks that would be eligible or score high on the ESG criteria. So, through your multi-cap funds, you are already getting a fair bit of an ESG flavour in your portfolio.

Hence, I would suggest that it may not be a bad idea for now to wait and watch how the ESG theme evolves in the Indian context. Till that time, continue to focus more on the multi-cap category of funds. Really, this is not any different from what we otherwise recommend on any new fund.

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