Infrastructure Mutual Funds which always used to lag behind have also surprisingly performed very well during this period. They have clocked returns of 31.8 percent and thus provided better yields than even mid-cap funds in the past year. So are infrastructure funds a good bet?
Why infra funds are a good bet for long-term investments
Investment in infrastructure related funds has markedly increased along with heightened interest by investors after the NDA won the 2014 elections and the Modi government took over.
There was positivity all around due to expectations of reforms push that may be initiated by Prime Minister Modi, and this initially caused a sharp rise in prices of infrastructure stocks.
Even though the optimism gradually faded away, the government kept working towards infrastructure development, bold reforms in associated sectors, and revival of important projects. This helped boost market sentiment in some infrastructure sector stocks.
The question remains whether such positive sentiment will sustain or not! Over the past many years the infra sector has been burdened with debt and has been one of the main contributors of ‘bad assets’ woes afflicting the banking sector. It is only now that several infrastructure companies with excess debt have commenced the process of reducing their liabilities.
Increased spending by the government on public works will benefit the industry but that may not necessarily lead to generation of healthy inflow of cash and increased earnings appreciation till the major players can successfully reduce their interest outflow by higher margins.
It may also be noted that only some infra companies are players in public works like railways and roads and they are the ones with continued revenue appreciation forecast. Thus, it can be quite a difficult task to select the right infrastructure stocks.
The best option is to invest in a dedicated infrastructure mutual fund with companies that engage in the infrastructure push led by the government. Another point to remember is the fact that you should go for an infrastructure fund only if you are willing to remain invested for a minimum of 5 years.
Five years can be considered as sufficient time for increased governmental expenditure to actually convert into earnings growth for infra companies and permanent resolution to varied issues currently plaguing the sector.
Investors also need to research on the different components of the portfolio of infra mutual funds. Funds of technology, banking, pharmaceuticals, and FMCG, etc. companies are restricted to just one sector. This is not the case with infrastructure funds as they are extensively exposed to different sectors connected to the infra industry, especially to stocks of engineering, construction, energy, and logistics firms.
Some infrastructure mutual funds also have investments in firms that have indirect links to the infra industry, such as metals, financial services, and telecom, etc. To this end several fund managers state that inclusion of such companies in the fund is warranted; for instance, banks provide loans for infra growth and such support exposure to the industry means that banks needs to be included in the infra fund.
It is widely believed by experts that including additional sectors to the fund is advantageous as it restricts the risk of exposure to just one segment. This can be easily noticed in the divergent performance of infra funds category vis-à-vis the Nifty Infrastructure Index.
During the period of last 3 years, returns of the infra funds category has been a good 14.47 percent per annum while the Infrastructure Index yields are -0.75 percent. Even when returns of the past 1 year are compared, the category yields of 31.8 percent comfortably beat the 18.5 percent return of the index.
It may however be noted that infrastructure funds with investments in sectors directly or indirectly related to other supportive segments may end up diluting the focused exposure that is sought by investors who invest in dedicated infrastructure funds.
For example, the portfolio of infrastructure funds such as DSP BlackRock T.I.G.E.R and UTI Infrastructure is quite large and consists of over fifty stocks. Investment experts state that such multiple segment exposure can be better realized via a diversified equity fund. It is known that any type of sector-focused mutual fund with a large diversified portfolio may to some extent eventually become comparable to a diversified equity fund.
People who want to invest in infrastucture mutual funds need to find out the type of exposure offered by the fund and then pick one fund that offers slightly targeted exposure to the infra segment.
Investors who are in it for the long term may select infra funds which have infrastructure theme at its core to get better returns. Investors who want to benefit from sector gains in the short term should however opt for a more diversified fund for higher returns.
Higher core exposure to infrastructure sector companies is offered by funds such as Kotak Infrastructure & Economic Reform, L&T Infrastructure, and IDFC Infrastructure. On the other hand, schemes like DSP Black-Rock T.I.G.E.R, Franklin Build India, and HDFC Infrastructure have larger exposure to infra associated segments such as banking.
Avoid choosing a fund just on the basis of returns over the last 1 year. It is best to select an infrastructure fund based on healthy yields over a prolonged period.