What are ESG mutual funds in India and should you invest in them in 2026?

ESG mutual funds in India let you invest in companies that score well on environmental, social and governance parameters, without completely giving up on returns. In 2026, they look more like a serious core-satellite option for long-term, values-driven investors than a passing trend, but they are not a magic bullet and still carry concentration and regulatory risks. 

What exactly are ESG mutual funds? 

In India, ESG mutual funds are equity schemes that pick stocks based not only on financials but also on how a company treats the environment, its people and its shareholders. Fund managers use ESG scores, sustainability reports and SEBI-mandated disclosures to build portfolios tilted towards cleaner, better-governed businesses. 

• SEBI and AMFI classify ESG funds as thematic equity schemes that must invest at least 80% of their assets following a defined ESG strategy (like “integration” or “exclusion”). 

• Typical portfolios are large-cap or flexi-cap heavy, with higher weights to sectors such as IT, financial services, auto and renewables where disclosures and governance standards are stronger. 

For an investor, the core idea is simple: don’t just ask “kitna return?”, also ask “kis company se aa raha hai yeh return?”. 

How big is the ESG opportunity in India? 

ESG is still a niche compared to the total mutual fund market, but the growth curve is steep. The total AUM of ESG-themed funds in India rose from about ₹2,747 crore in early 2020 to roughly ₹9,700–10,800 crore by 2024–2025. At the same time, the broader India ESG investing market (including funds, green bonds and impact products) is projected to grow at a 23.3% CAGR between 2025 and 2030, reaching about USD 4.1 billion by 2030. 

• Research shows at least 8–11 dedicated ESG mutual fund schemes were available by March 2024, led by pioneers like SBI Magnum Equity ESG Fund launched in 2013. 

• Across these schemes, IT, financials, autos and consumer sectors dominate the portfolio mix, reflecting where Indian corporates have relatively better ESG processes and disclosures. 

Add to this a regulatory tailwind: SEBI’s BRSR framework makes ESG disclosures mandatory for the top 1,000 listed companies, with BRSR Core and value-chain coverage thresholds expanding till FY27. This matters because more consistent data should improve ESG fund quality and reduce greenwashing over 2026–27. 

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How have ESG mutual funds performed? 

ESG funds in India were initially seen as “ethical but low-return” products, but actual performance has been far more competitive. Several leading ESG funds have delivered mid-to-high teens annualised returns over 3–5 years, broadly in line with or slightly ahead of diversified equity peers. 

• A 2025 snapshot shows funds like Quantum ESG, SBI ESG Exclusionary and Axis ESG Integration reporting 5-year CAGR in the 18–22% range, with AUM ranging from about ₹100 crore to over ₹5,700 crore. 

• Independent research on ESG funds in India using risk-adjusted metrics finds that the category has been able to generate reasonable Sharpe ratios, though with sector tilts and tracking error versus broad indices. 

That said, performance dispersion is high: stock selection quality, ESG methodology (integration vs exclusion vs impact) and expense ratios can make a 3–5 percentage point difference in long-term outcomes. For 2026 investors, treating ESG as a thematic satellite and not a blind “feel-good” replacement for core large-cap exposure is crucial. 

Should you invest in ESG mutual funds in 2026? 

For 2026, the answer depends on your goals: ESG funds can make sense as a 10–20% satellite allocation in a long-term equity portfolio if you care about sustainability and can handle equity-style volatility. 

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Why ESG can work in 2026: 

• Regulatory push: SEBI’s tighter rules on ESG funds (strategy-specific naming, 80% minimum ESG allocation, stronger disclosure norms) are cleaning up the space and forcing funds to be clearer about how they implement ESG. 

• Macro & policy tailwinds: India is pushing renewable energy, EVs, green hydrogen and climate-tech, while banks and IT services are also ramping up ESG practices—areas where ESG funds tend to be overweight. 

Key risks to keep in mind: 

• Thematic and sector concentration: Many ESG portfolios are tilted to a handful of sectors with strong disclosures, which can underperform if that pocket of the market corrects. 

• Methodology and greenwashing risk: Different funds use different ESG rating providers and strategies; without careful due diligence, investors can end up in “ESG in name only” portfolios. 

For Rits Capital clients, ESG funds typically suit: 

• Long-term investors (5–7+ years) wanting alignment with sustainability values. 

• HNIs and family offices under increasing ESG reporting pressure from global partners. 

• Young professionals who are okay with slightly higher expense ratios in return for values-aligned exposure. 

How to evaluate ESG mutual funds before investing 

Rather than chasing the “ESG” label, focus on data and process. A structured checklist helps you avoid hype and pick funds that match your risk-return profile. 

• Check long-term returns and risk 

• Look at 3-year and 5-year returns versus a suitable benchmark and versus large-cap or flexi-cap funds, not just 1-year numbers. 

• Review volatility and drawdowns; some ESG funds can be as volatile as mid-cap strategies due to sector and factor tilts. 

• Understand the ESG strategy 

• Integration: ESG is embedded into fundamental research and valuation models. 

• Exclusion: Certain industries (e.g., tobacco, coal) are simply screened out. 

• Impact / thematic: Focus on specific themes like renewables or social inclusion. 

• Look at portfolio & costs 

• Scan top holdings and sector weights to ensure you are not unknowingly duplicating your existing large-cap fund. 

• Compare expense ratios; some ESG funds still charge a premium even when managing sizeable AUM, which can eat into long-term returns. 

Final words:

At Rits Capital, ESG is evaluated alongside business quality, management integrity and financial strength, not as a standalone filter. 
 
For serious investors, the real alpha often comes from combining ESG insights with traditional fundamental analysis, rather than treating ESG scores as a shortcut. 

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FAQs: 

1. Are ESG mutual funds regulated differently in India? 
Ans: Yes. ESG funds fall under SEBI’s thematic equity category and must align with specific ESG strategies (integration, exclusion, impact, etc.) with at least 80% of AUM invested in line with that strategy, and detailed ESG disclosures mandated via SEBI and AMFI guidelines. 

2. Do ESG funds give lower returns than normal equity funds? 
Ans: Not necessarily. Many ESG schemes have delivered competitive, and in some cases better, 3–5 year returns versus conventional equity funds, though there is high dispersion and sector bias, so stock selection and fund house quality matter a lot. 

3. What kind of investor should consider ESG mutual funds in 2026? 
Ans: They suit long-term investors who want to align investments with sustainability values, are comfortable with equity risk, and can take a thematic satellite exposure in addition to core index or large-cap funds. 

4. How much of my portfolio should I allocate to ESG funds? 
Ans: For most retail investors, a 10–20% allocation within the equity bucket is a reasonable starting range, depending on risk profile and conviction, while keeping the rest in diversified large-cap, flexi-cap or index funds. 

5. Are ESG scores in India reliable yet? 
Ans: Data quality is improving, with SEBI’s BRSR framework and expanding coverage of top 1,000 companies and their value chains by FY26–27, but methodologies still differ across rating providers and funds, so qualitative assessment and manager track record remain critical. 

6. Can NRIs invest in ESG mutual funds in India? 
Ans: Yes, subject to standard NRI mutual fund rules such as KYC, FATCA and bank/demat regulations, NRIs can invest in Indian ESG schemes just like other equity mutual funds, though specific country restrictions may apply at some AMCs. 

7. How can Rits Capital help with ESG investing? 
Ans: A dedicated research-led approach can help you: shortlist credible ESG funds, avoid greenwashing, integrate ESG allocation into your overall asset mix, and monitor both performance and sustainability metrics as regulations evolve through 2026 and beyond.