Even as the oil shock fuelled by the war in the Middle-East has strained the economy, equity mutual funds (MFs) that invest in shares of companies engaged in the energy business have emerged as one of the best performers. Equity MFs, whose portfolios comprise almost exclusively of stocks of companies in the energy sector, have gained 9.4% so far in 2026. They have gone up by nearly 10.1% on an average in the last one year, the second-best performance in the equity MF category.
The Nifty Energy Index has advanced by 14.3% so far in 2026 on an absolute basis compared to the 8.1% and 4.9% decline registered by the Nifty-50 and Nifty-200 indices. The index rose by 13.1% in the one-year timeframe compared to 3.9% drop recorded by the Nifty-50 index while the broader Nifty-200 index remained largely unchanged. Equity MFs in the space have largely invested in the shares of , Oil India, Coal India, Power Grid Corporation and BHEL (Bharat Heavy Electricals). While the BHEL scrip has surged 43.3% so far in 2026, it was followed by ONGC (20.5% gain), Coal India (16.5% rise), NTPC (16% increase) and Oil India (15.2% rise).
What are the reasons for the strong performance?
“Energy-focused equity mutual funds have outperformed due to strong earnings growth in power, capital goods, oil and gas, and renewable energy companies, supported by government capex, rising electricity demand, PSU re-rating, and the theme,” said Aditya Agrawal, Chief Investment Officer, Avisa Wealth Creators, a wealth management platform.
“Energy equity mutual funds are delivering exceptional returns while broader market categories struggle because of a combination of elevated international commodity prices, soaring power consumption, and massive public capital expenditure,” said Abhishek Bhilwaria, an AMFI (Association of Mutual Funds in India)-registered MFD. “While broader markets faced valuation pressures, energy companies benefited from strong domestic structural tailwinds,” Agrawal said.
“Geopolitical supply disruptions and tightly controlled global production have consistently kept crude oil and natural gas prices high, which directly expands the profit margins of upstream exploration and production companies. At the same time, rapid industrial growth has driven domestic electricity demand to historic highs,” experts said.
Since governments are heavily funding grid modernisation, traditional utilities, and green energy infrastructure to meet this demand, the energy sector has remained strongly insulated from the economic downturn affecting other market segments, they said.
Can they be a part of the portfolio of investors?
“These funds can form part of investor portfolios, but only as tactical/satellite allocations due to their concentrated and cyclical nature,” Agrawal said. “While energy funds can be a valuable addition to an investment portfolio, they must strictly be used as a tactical allocation rather than a foundational core holding,” Bhilwaria said. “These funds are designed for aggressive, high-risk investors who can tolerate intense volatility and understand how to time industry-specific cycles to capture concentrated upside,” he said.
Regulatory frameworks mandates that sectoral funds should invest at least 80% of their net assets exclusively within their specified sector. “This strict lack of cross-industry diversification means that unlike broad flexi-cap or multi-cap funds, an energy fund offers no safety net. When the energy cycle inevitably faces a downturn, the fund’s value will decline sharply without other industries to cushion the blow,” Bhilwaria said.
What are the near-term and long-term prospects of the category?
Though the outlook for the energy category is bullish, the performance will be driven by stability in fossil fuel prices and capital spending by companies in the sector. “Near-term prospects remain supported by policy push and infrastructure spending, while long-term growth is backed by India’s increasing energy needs and renewable expansion,” Agrawal said.
“Investors must watch out for localised corporate margin pressures caused by high raw energy costs,” Bhilwaria said. “Over the long-term horizon of five to ten years, the prospects pivot completely toward a massive structural transition where renewable energy generation like solar, wind, and green hydrogen will lead expansion,” he said.
“This creates a dual-track dynamic where traditional fossil fuel assets face regulatory contraction, while clean energy components offer multi-year growth, requiring fund managers to actively shift their underlying holdings,” Bhilwaria said.
How much should investors allocate towards thematic equity MFs?
Investors should strictly cap their total exposure to all thematic mutual funds. “Thematic funds should ideally be restricted to about 10%–15% of the overall equity portfolio,” Agrawal said. The remaining capital must be invested in diversified equity categories, such as large-cap, mid-cap, or flexi-cap funds, to ensure long-term wealth stability and steady compounding, Bhilwaria said.
Since the energy sector is currently trading near cyclical highs, investors should avoid lump-sum entries and instead use systematic investment or transfer plans to average out market entry costs. Furthermore, it is critical to enforce strict rebalancing rules. If an aggressive rally pushes your energy holdings beyond the 10% limit, you should proactively book profits and move them back to your diversified equity funds.