Market experts say this performance is cyclical and event driven, existing investors can book partial profits if allocation is exceeding, new investors should avoid lumpsum and prefer SIP or STP.
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Swati Jain, CEO Wealth, Arihant Capital Markets told ETMutualFunds that this performance is largely cyclical and event-driven, rather than a reflection of a sustained structural trend. Existing investors can book partial profits, especially if the allocation has moved beyond intended levels due to recent gains.
“That said, a complete exit may not be necessary, as long-term structural drivers such as rising power demand and the transition to renewables remain intact. Fresh investors should avoid deploying lump sum investments at current levels. Near-term volatility could remain elevated due to global triggers, making a staggered approach through SIP or STP more suitable.”
Jain further said that energy sector funds should be viewed as tactical allocations rather than core portfolio holdings, where timing and disciplined allocation play a key role.
Another expert, Amitabh Lara, Executive Director, Anand Rathi Wealth Limited shared with ETMutualFunds similar reasons for the surge and said that one should avoid investing in sectoral/thematic funds, as they tend to be cyclical in performance and can be volatile.
Amitabh further said that for one who has already invested in energy sector funds, it is suggested to rebalance to diversified funds and reduce allocation following the recent rally and before making any exit decisions, investors should also consider to evaluate exit loads and tax implications
There are seven actively managed funds based on the energy sector. Out of these seven funds, Nippon India Power & Infra Fund gave the highest return of 15.59% in the last three months, followed by ICICI Prudential Energy Opportunities Fund which gave 14.56% return.
DSP Natural Res & New Energy Fund and Tata Resources & Energy Fund gave the lowest return of around 8.93% and 8.70% in the last three months.
What is driving the outperformance of energy funds?
Amitabh said one should consider that the energy sector is broadly diversified across sub-sectors such as oil & gas, power, OMCs, and capital goods, among these, oil & gas and power companies account for more than 50% of the sector’s overall weight and the recent performance in the sector has been driven by multiple factors.
He further said that firstly the oil & gas upstream firms have witnessed favorable conditions on the back of rising crude oil prices, the companies in the power space have recorded strong business numbers due to rising power demand and also due to policy support from the government in favor of domestic energy infrastructure.
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Jain said that the rally in energy funds has been driven by a combination of global + domestic factors which includes rise in crude oil prices due to geopolitical tensions, supply concerns, including potential global supply gap and Middle East risks, strong growth in power demand, continued infrastructure push, expansion in renewable energy with policy backing and improvement in PSU energy companies’ balance sheets boosting investor confidence.
How sensitive are energy funds to global factors?
Energy funds are among the most globally sensitive investment categories. Their performance is closely linked to crude oil prices, currency movements, and geopolitical developments.
According to a report by ETMarkets, oil prices extended their gains on Thursday, building on a sharp rally in the previous session as stalled peace talks between Iran and the United States kept markets on edge. Both countries continue to restrict trade flows through the Strait of Hormuz.
The report further said that although the U.S. President Donald Trump extended a ceasefire following mediation efforts by Pakistan, tensions remain unresolved. Iran and the U.S. are still limiting vessel movement through the Strait of Hormuz, a critical route that previously handled about 20% of global oil and LNG flows before the conflict began in late February with U.S. and Israeli strikes on Iran.
Commenting on the sensitivity of energy funds to global factors, Jain said that energy funds are highly linked to global factors, so volatility can be higher, geopolitical events (like Middle East tensions or wars) can suddenly spike prices, currency movement (INR) matters, as India is a net oil importer—any depreciation will impact and lastly, global demand cycles also play a role—economic slowdown can reduce energy demand and impact returns.
Amitabh said that the energy sector is highly sensitive to global factors, especially crude oil prices, which directly impact company performance, the geopolitical tensions can push prices up but also increase volatility and demand cycles, currency movements, and domestic policies like subsidies or taxes further influence the sector’s outlook.
In the last one year, energy sector based funds have offered an average return of 17.04%. Out of six funds who have completed one year of existence, DSP Natural Res & New Energy Fund delivered the highest return of 31.48% in the last one year, followed by ICICI Pru Energy Opportunities Fund which gave 19.31% return.
Baroda BNP Paribas Energy Opportunities Fund offered the lowest return in the last one year of around 11.06%.
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Way ahead for energy sector and energy sector based funds
So with strong historical performance, what allocation should investors consider and what is the outlook?
Amitabh said that in the near term the energy sector may perform better with underlying sectors such as upstream companies, power & gas companies. However, for investors, it is suggested to avoid investing in sectoral/thematic funds as they tend to undergo cyclical performance and increase concentration risk in the portfolio.
He further said that instead, investors are suggested to invest in active diversified equity funds such as market cap-based funds, strategy-based funds, which enables auto diversification across the sectors & themes and reduces concentration risk & helps to ride across market cycles while maintaining stability in the portfolio.
To this Jain said that conservative investors can have an allocation between 0–5%, moderate investors can have allocation between 5–10% and lastly, aggressive investors can have allocation between 10–15% (tactical only).
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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