Sample this, DSPBR TIGER, a mutual fund scheme, has invested over 28 per cent in financial stocks and more than 16 per cent in energy sector stocks, as on January 31, 2013. The story is repeated with Birla Sun Life Infrastructure, which has put over 30 per cent of money in financial and more than 20 per cent in energy. Take a look at Franklin Build India and you will see financial and energy sector as top two sectoral holding.
In comparison, technology funds Birla Sun Life New Millennium, DSPBR Technology.com Reg or Franklin Infotech hold more than 75 per cent technology stocks. FMCG funds like ICICI Prudential FMCG Reg, SBI FMCG invest over 90 per cent in FMCG and consumer durable stocks. Banking funds include financial services stocks in place of only bank stocks.
As a result, ICICI Prudential Banking and Financial Services Reg returned a little over 26 per cent in one year, best performing infrastructure fund, Franklin Build India, returned 15.19 per cent and the best performing equity diversified fund, SBI Bluechip, (with 25 per cent in financials) returned 19.24 per cent in the same period.
As against this, the BSE FMCG index has returned more than 34 per cent in the last one year and the best performing FMCG fund, SBI FMCG, has returned nearly 41 per cent in the same period. Similarly, the BSE IT Index has given 7.50 per cent and the best performing technology fund, ICICI Prudential Technology Reg, returned almost 16 per cent in the same period.
Explains Hemant Rustagi of Wiseinvest Advisors, Infrastructure is a theme and not a sector. Hence, the mandate for infrastructure funds is very wide, wherein the funds are invested in infrastructure development companies, companies that benefit from infrastructure development, related policies like construction and engineering companies and banks that finance these projects. On the other hand, a sector has a very narrow definition. For instance, a pharma fund can invest only in manufacturers and research & development firms.
In infrastructure and power sector funds, segments that used to be multibagger themes in the pre-2008 period, are full of stocks that are from other sectors. Reason being that these funds started at a time when the infrastructure theme was outperforming all others sectors and therefore a lot of money was mobilised in these funds when they were launched. But when markets fell following the global economic crisis, these themes were worst affected and despite the long term growth story linked to these themes, they have not been able to bounce back. This has also pushed these funds to include other sector stocks in their portfolio and help investors limit their losses.
Says a senior executive from UTI Mutual Fund, That infrastructure theme was mis-sold to investors, by creating a lot more enthusiasm around it than it called for and by saying this was the only place to be. After the theme flopped, even the strict funds have had to throw in the towel and buy banking because that is the only sector that has helped make money in all this while and helped retain customers in the theme by steadying their losses. Not that there arent opportunities in this space, but investors are not ready to wait that long.
However, if you still want to dabble in the segment you wont find many pureplay infrastructure. While there are only 51 infrastructure funds, only four have higher construction / infrastructure holding like PineBridge Infra and Eco Reform Standard-G (holds 23 per cent construction stocks, 14 per cent engineering stocks and 11.50 per cent energy stocks; annual returns = (-) 4.78 per cent), Escorts Infrastructure (holds 18 per cent construction, 15 per cent engineering and 13 per cent energy), Reliance Infrastructure (holds 27 per cent construction, 20 per cent metals and 16 per cent energy) and Sahara Infrastructure (holds 31.50 per cent construction and 29 per cent energy). There are seven funds which have lower investments in other sectors like BOI AXA Focussed Infrastructure, Baroda Pioneer Infrastructure, Canara Robeco Infrastructure, IDFC Infrastructure, Tata Infrastructure, Religare Infrastructure and Taurus Infrastructure. But all these funds have higher investment in the energy sector, anywhere between 18 and 45 per cent, according to mutual fund rating agency Value Research.
Hence, if you are looking at diversifying your equity portfolio with mutual funds, that is, if you want to invest in a large, mid-and small-cap, exchange-traded fund (ETF) and a sector fund, it can get a little difficult. But, Renu Pothen, research head of Fundsupermart.com has a solution. If the portfolio already has a banking sector fund or an equity diversified fund heavy on banking, then I will not advise a financials heavy infrastructure fund. I will go for something that is heavy on infrastructure related stocks. But, if you dont have exposure to say the banking sector through other funds then such investors can go for theme-funds which are heavy on financial.
Many feel that though the infrastructure funds were launched at the right time in India, Indian markets and investors are not mature for it. Typically, markets may take a long time to realise the potential of such themes because the gestation period of such themes is eight-10 years, on an average. And in situations like the one at present, where the markets have been volatile for the four-five years, infrastructure themes can take up to 15 years to deliver returns. Therefore, says certified financial planner Sumeet Vaid, if the schemes were launched may be 3-4 years ahead of project completion, the funds would have done better and investors would have been lured to it.
Vaid feels simple asset allocation or diversified equity, debt and gold. He says in the other option for participating in theme play, provided you are sure about it, could be Exchange Traded Funds (ETFs). ETFs are mostly either index based or commodity based. But, there is only one infrastructure ETF, Goldman Sachs Infra BeES (annual returns = (-) 11.75 per cent). The other ETF theme is PSU, which is safer.
What should you do then? Does it make sense to go the infrastructure stocks way for diversification? While financial experts reiterate individual investors should stay away from direct equities until they want to invest and forget, that is, invest for the long term (five-seven years), those with a very high risk appetite or savvy investors could look at up to 10 per cent in stocks if they are bullish about the theme.
The infrastructure space has seen event / news-based rallies here and there but those did not last very long. For instance, the market rally in January 2012 saw many of these stocks jump 80-90 per cent. However, concerns on economic headwinds continue to cloud the sector and spurts in stock prices tend to be short lived. Today, expectations of an interest rate cut is a big positive for these stocks as it will improve the prospects of these companies. However, experts say it is premature to expect a turnaround as rates are unlikely to come down drastically and the companies in the space are highly leveraged. Government policies havent made much of a difference to the sector. Therefore, investors could wait till there is some on-ground activity seen like the resumption of capex cycle. Investors should remember that revival in this space will be a long-drawn one as it is dependant on many factors at the same time. And at present, market experts are not firmly bullish on it. Importantly, investors should be selective in stock picking. It is best for individual investors to stick to big names like L&T, PTC India and Power Grid.