Energy Funds: What next after oil on the boil

After witnessing huge crash in the crude oil prices between the year 2013-15, they were rose again since the start of 2016. From a bottom of US$ 28.19 per barrel on January 21, 2016, prices of crude oil are on rising and touched US$ 80 per barrel recently. The rising crude oil prices will hurt the entire Indian economy as we are a huge importer of crude oil.

India imports 70 per cent of its total consumption of crude oil. For FY18, India spent US$ 87.3 billion in importing crude oil, which was 23 per cent higher than the previous year. According to one study, with every US$ 10 per barrel increase in oil prices, our import bill is likely to increase by US$ 8 billion. It will also lead to the widening of current account deficit by 27 basis points and rise in inflation by 30 basis points.

Besides the economy, it will also impact various companies. Most of the oil marketing companies will adversely get impacted by rising crude oil prices. Some of the prominent names are BPCL, HPCL and IOC. In the last three months, when the prices of crude oil kept on hitting new yearly high every day, the stock prices of the above-mentioned companies kept on declining. In the last three months prices of HPCL, BPCL and IOC were down by 18 per cent, 6 per cent and 9 per cent, respectively. During the same time, the bellwether index is up by 12 per cent.

Such underperformance by energy companies will greatly impact the performance of mutual fund schemes dedicated to the energy sector and even to those funds who hold more of these stocks in their corpus. Although, there is three energy dedicated funds currently, only one has an asset under management of more than Rs. 100 crore.

DSP BlackRock Natural Resources and New Energy Fund is one of the largest energy dedicated funds that has given a return of 9.12 per cent in the last one year, however, in last three months it has declined by 8.27 per cent. One of the reasons for such decline is fall in the value of the fund, this is because it holds more than 20.91 per cent in these companies.

Other funds that hold more than 10 per cent of their AUM in these stocks are as follows.

What should you be doing with these funds now if they are part of your portfolio? We believe other than DSP BlackRock Natural Resources and New Energy, no other fund has major holdings in oil marketing companies. Therefore, you can remain invested in these funds as their other holdings will help you to reap gains in the future.