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ESG (Environmental, Social, Governance) Funds

Do you know what’s a good place to be in? It is being an investor and being responsible while investing. ESG mutual funds give you a chance to do that. These funds invest in the stocks of companies that are environmentally & socially responsible and follow corporate governance. And then, the fund manager evaluates the financial factors as well. The idea here is to encourage companies that are making environmentally conscious decisions, follow ethical business practices, focus on corporate social responsibility and understand their social responsibilities. Any such organisation is called ESG compliant.

Why ESG?

We have recently seen a lot of social and environmental changes. Whether it is the pollution, climate change, or the side effects of technology, organisations today need to focus on protecting the ecosystem around us. The socially aware companies are also said to be more employee-friendly and humanised in their ways. And such responsible organisations are the need of the hour. For example, is a company producing garments making eco-friendly clothes? Or is a company making chemicals, discarding its waste into our oceans and rivers? These are some of the practices that are taking us towards an unhealthy planet in the future. ESG organisations are more aware of the damage they can produce, and they are ready to control it. And in this, investors also have a huge role to play. If you start investing in companies that are more responsible, it can force the other companies to follow ESG as well.

What should you know about ESG funds as an investor?

- Investing in ESG does not necessarily mean that you are compromising on your returns. It is not an ‘either-returns-or-responsibility’ scenario.
- NIFTY 100 ESG Index is an ESG benchmark
- The companies chosen must win in all the three criteria, i.e., environment, social, governance
- There are some sectors, that by the nature of their services/products, may not be included or very high on the ESG index
- Being relatively new, there is not a lot of past data to rely upon
- Just because a company declares that its processes are ESG oriented, does not mean it can qualify for an ESG fund. There are proper checks in place to ensure that.

How are ESG funds taxed?

The capital gains from ESG funds are taxed as any other equity mutual fund.

Short-term capital gains (STCG) tax- If your holding period is not more than 12 months, the capital gains are considered as STCG, which is currently taxed at 15%.

Long-term capital gains (LTCG) tax- For a holding period of more than 12 months in equity schemes, the capital gains are considered as LTCG, which is currently taxed at 10%, if your capital gain is Rs 1 lakh or above and comes with a Grandfathering clause. This clause basically exempts all gains made before 31st Jan’18 from any tax.

The information is provided for general information only. However, in view of the individual nature of the implications, each investor is advised to consult his or her own tax advisors/authorised dealers with respect to the specific amount of tax and other implications arising out of his or her participation in the schemes.

Mutual Fund Investments are subject to market risks, read all the scheme related documents carefully

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