Bet on infrastructure funds to gain from government push: Experts

High cost of capital, change in policy key risks for these funds

The government’s sustained infrastructure push is boosting the performance of infrastructure funds. Over the past three years, the regular plans of these funds have delivered a category average trailing return of 21.3 per cent annually (compared with the Nifty 50 Total Return Index’s 16.3 per cent over the same period).

Infrastructure funds invest in companies that own, build, help build, or operate infrastructure assets. Energy, construction, construction materials, telecom, power, services, automobiles, healthcare services and capital goods are the key sub-segments within this theme.

Bright outlook

Fund managers feel the infrastructure sector is enjoying a strong tailwind. “Government policies and public expenditure are very important for the infrastructure sector. India has ambitious plans for energy transition. Railways modernisation, transportation infrastructure and indigenisation of defence production are also big themes,” says Sachin Relekar, senior fund manager, IDFC Asset Management Company (AMC).

Many infrastructure schemes were floated between 2004 and 2008. Infrastructure, metals, and real estate stocks were at the forefront of the market rally then. In the early years of the previous decade, the sector fell out of favour because of a host of factors. Over the past seven years, however, both government investments and private sector participation in the sector have bounced back.

Though infrastructure stocks also fell in March 2020 along with the rest of the market, they rebounded quickly. 

“The theme is likely to do well due to the push for more ports, airports, roads, power transmission networks, and communication infrastructure,” says Ravi Kumar TV, founder, Gaining Ground Investment Services.

Segments such as aviation, capital goods, and transportation are expected to register high growth. 

Active and passive options

Both active and passive funds are available within this space. While most of the schemes are actively managed, two exchange-traded funds (ETFs) from Nippon India AMC and ICICI Prudential AMC, which track the Nifty Infra Index, are also available.

Avoid portfolio overlap

Those planning to invest in such funds must remember that many stocks in the portfolios of these funds would already be owned by the diversified equity funds held by them. “To avoid significant overlap with other portfolios, opt for an actively managed fund focused on the core infrastructure theme, which has not invested in the financiers of infrastructure,” says Vishal Dhawan, founder and chief executive officer (CEO), Plan Ahead Wealth Advisors.

Adds Kumar: “Avoid funds that have high exposure to banking and non-banking financial companies (NBFCs).” 

Concentration, interest-rate risk

Like all other thematic/sector funds, infrastructure funds also carry a concentration risk. An economic slowdown or a change in government policy could also adversely impact this theme.

“Infrastructure projects have a cyclical element. They also have long gestation periods. Favourable cost of capital over the long term is an important factor for this capital-intensive theme. Another is the state of government finances as public expenditure is a key driver of infrastructure projects,” says Relekar.

Enter with a long horizon

Since infrastructure projects have long gestation periods, investors, too, need to enter them with a long horizon of at least 10 years. These thematic funds should ideally be held in the satellite portfolio. “Investors with an aggressive risk profile may invest in infrastructure funds. They should do so in a staggered manner as valuations are not cheap across the segments these funds invest in,” says Dhawan.

Exposure to these funds should be limited. “Not more than 5 per cent of the equity portfolio should be invested in infrastructure funds,” says Kumar.

Pick a fund with a good track record that sticks to its investment mandate.