India’s first clean economy index fund is here: Should you invest?

The New Fund Offer (NFO) closes on June 19, offering a transparent, rules-based entry into the structural transition towards a cleaner economy. Unlike traditional ESG funds that screen how a company operates, this 25-stock fund targets what they actually do. It offers pure-play exposure to five structural, decadal themes: Renewables, EVs, Water Treatment, Recycling, and Waste Management.

Edited excerpts from a chat with Pratik Oswal – Chief of Passive Business, Motilal Oswal Asset Management Company:How is Motilal Oswal BSE Clean Environment Index Fund different from an ESG-focused fund?
Most ESG funds focus on how companies operate — governance standards, environmental disclosures, carbon intensity, board practices and other ESG metrics.

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The challenge is that ESG can often be subjective. Depending on the methodology, many ESG portfolios can end up looking quite similar to broad market indices because large, established companies tend to score well on governance and disclosure standards. In many cases, investors may struggle to identify a meaningful difference between a broad market portfolio and an ESG portfolio.

The Motilal Oswal BSE Clean Environment Index Fund takes a different approach. It focuses on what companies do. The index invests in businesses whose products and services directly contribute to solving environmental challenges through themes such as renewable energy, electric mobility, water treatment, recycling and waste management.In simple terms, ESG is often a screening framework, whereas the Clean Environment Index is a growth-oriented thematic strategy seeking to participate in the structural transition towards a cleaner economy.

The 5 themes of Renewables, EV, Water Treatment, Recycling, and Waste Management are decadal opportunities in India. While renewables and EV are well-known, how big is the opportunity size in the remaining 3 areas?
The opportunity in water, waste management, and recycling is significantly larger than many investors appreciate because these sectors are solving real infrastructure deficits.

Water Treatment
India generates roughly 72,000 MLD of wastewater every day but treats only about 28% of it. The Indian water treatment market is expected to grow from approximately $9.6 billion in 2024 to around $18.6 billion by 2033. Government programs such as Jal Jeevan Mission are accelerating investments in this area.

Waste Management
India generates over 60 million tonnes of municipal waste annually, but only a fraction is scientifically processed. The solid waste management market is projected to grow from about $7.8 billion in 2025 to $10.4 billion by 2030, supported by urbanisation, stricter regulations and increasing municipal spending.

Recycling
India is already among the world’s largest generators of e-waste, yet formal recycling rates remain low. As EV adoption accelerates and battery usage rises, recycling is likely to become a critical industry.

What makes these themes particularly interesting is that while the opportunity size is enormous, the listed universe is still relatively small. Many of these businesses are in the early stages of their growth journey. We saw something similar in renewables a decade ago, where there were very few meaningful listed opportunities. Today, renewables have become one of the largest investment themes in the market. We believe water treatment, recycling and circular economy businesses could follow a similar trajectory over the next decade as policy support, environmental regulation and capital investment continue to increase.

BSE Clean Environment Index is relatively concentrated with only about 25 stocks. Some of these themes, like Water Treatment and Recycling, feature smaller, mid-to-small cap names where liquidity can thin out fast. As the AUM grows, how do you plan to manage tracking error and potential impact costs during rebalancing?

This is an important consideration for any thematic index strategy.

First, the index follows a transparent, rules-based methodology and includes liquidity filters before stock inclusion. Second, index rebalances are relatively infrequent, which naturally limits portfolio turnover.

From a fund management perspective, we have extensive experience managing differentiated passive products, including niche segments such as Defence and Microcaps. We typically use a combination of phased execution, liquidity monitoring, creation-redemption mechanisms and disciplined trading practices to minimise market impact.

At current industry AUM levels, we believe there is adequate capacity within the underlying universe. As assets grow, execution efficiency remains a key focus area to ensure tracking error remains well controlled.

Thematics are traditionally the domain of active fund managers who can aggressively time entries and exits or cut exposure to failing sub-sectors. Why is a passive, rules-based strategy a better vehicle for a nascent, fast-evolving space like the clean economy?
The challenge with active thematic investing is that investors need two things to go right: identifying the right theme and identifying the right fund manager.

A passive strategy removes one layer of uncertainty. Investors gain exposure to the theme through a transparent and rules-based framework rather than relying on individual stock-picking decisions.

In rapidly evolving sectors, predicting which specific company will emerge as the winner is often difficult. History shows that some of the biggest wealth creators were not always the most obvious choices early on. A diversified index allows investors to participate in the broader opportunity set while automatically adapting to changes through periodic rebalancing.

For long-term structural themes, we believe the question is often less about picking the next winner and more about ensuring participation in the overall growth of the ecosystem.

Motilal Oswal has carved out a unique identity in the passive space by avoiding standard Nifty 50 copies and focusing on differentiated building blocks (Microcaps, Defence, International, and now Clean Environment). Is the broader goal for MOAMC to become a ‘satellite portfolio’ specialist for Indian investors?
Our ambition is broader than being a satellite portfolio specialist. We want to be a passive investing specialist.

When we started building our passive business in 2019 (our second attempt in passives), the category was still relatively nascent in India. Since then, we have grown from almost no passive AUM to nearly ₹60,000 crore, making us one of the fastest-growing passive franchises in the country.

Our strategy has always rested on three pillars:

Innovation – bringing differentiated products to market rather than simply launching another Nifty 50 clone.

Education – helping investors understand passive investing, factor investing, international diversification and thematic opportunities.

Efficiency – ensuring investors receive the index return they signed up for. Tracking error is one of the most important metrics in passive investing, and across many of our products we are among the industry leaders on this measure.

Whether it is Defence, Microcaps, International, Factors or now Clean Environment, our objective is to provide investors with a comprehensive toolkit of passive solutions. While thematic funds tend to be more memorable – today we have 70+ funds across most categories and launching many more this year.

We believe passive investing in India is still in its early innings, and we intend to remain at the forefront of its evolution.

With so many thematic funds being launched in the industry, it can be a daunting task for retail investors to figure out which scheme to pick. How would you suggest one can keep it simple without missing out on big opportunities?

Investors often make the mistake of evaluating thematic funds over a 6-12 month period. In reality, thematic investing requires a very different mindset.

Themes tend to be more cyclical than broad market funds. They can go through periods of significant outperformance, but they can also experience sharp drawdowns and extended periods of underperformance. Investors should therefore be prepared for higher volatility and a longer holding period.

In our view, thematic funds are best used as satellite allocations around a diversified core portfolio rather than as the foundation of the portfolio itself. Position sizing is important.

More importantly, investors should only invest in themes where they have a strong long-term conviction. If the investment horizon is less than 5-7 years, thematic investing may not be appropriate. Ideally, investors should approach such opportunities with a 10-year perspective, allowing enough time for the underlying structural trend to play out.

The objective is not to own every theme that comes to market. The objective is to identify a handful of long-term transformations that are likely to shape the economy over the next decade and then remain patient through the inevitable ups and downs. We believe the transition towards a cleaner economy is one such structural transformation.