These are interesting times for investors. The testing market conditions have finally offered them the opportunity to appropriately evaluate their investments. Over the past few years, when equity markets rose almost secularly, the investment scenario became rather skewed. Any fund that took on above-average risk was capable of delivering a superlative performance. As a result, some prudently managed funds ended up looking rather mediocre and some mediocre funds managed to pitch in noteworthy performances.

Infrastructure funds have emerged as favourites with investors over the past few years. Given how markets are poised, we thought now would be a good time to put infrastructure funds under the scanner.

For the purpose of this study, we chose infrastructure funds with at least a 3-Yr track record. Since the infrastructure funds phenomenon is of recent origin, there were just a handful of funds that passed muster on this parameter. From the non-thematic i.e. diversified funds segment, we decided to pick an assorted mix. For instance, DSP ML Top 100  "a fund whose investment universe is the top 100 stocks based on market capitalisation, HDFC Top 200" a fund that pursues the index plus investment style and Fidelity Equity a fund that invests freely across stocks and sectors with no style bias.

Infrastructure vs. Diversified: The big face-off

	NAV (Rs)	6-Mth (%)	1-Yr (%)	3-Yr (%)	Std. Dev. (%)	Sharpe Ratio (%)
Diversified Equity Funds
DSP ML Top 100 (G)	73.76	0.9	15.6	38.9	7.93	0.33
HDFC Top 200 (G)	135.4	-2.4	14.4	34.9	7.21	0.30
Fidelity Equity (G)	24.35	-5.1	3.75	33.0	7.38	0.31
Infrastructure Funds
Tata Infrastructure (G)	31.53	-6.2	22.8	41.0	9.31	0.32
DSP ML TIGER (G)	40.54	-9.7	10.9	40.6	9.41	0.29
UTI Infrastructure (G)	33.45	-11.0	10.3	37.4	9.09	0.28
BSE Sensex		-18.6	11	33.5

(Source: Credence Analytics. NAV data as on June 2, 2008.)
(Standard Deviation highlights the element of risk associated with the fund. Sharpe Ratio is a measure of the returns offered by the fund vis-à-vis those offered by a risk-free instrument)

Over the 3-Yr time frame, infrastructure funds steal the march over their diversified peers. For instance, despite delivering a competent showing, none of the diversified funds can match the performance of Tata Infrastructure (41.0% CAGR) and DSP ML TIGER (40.6% CAGR). Sadly, none of the infrastructure funds have a 5-Yr track record; hence a comprehensive comparison over this time frame isn't possible.

But it is worth noting that over the 6-Mth time frame, when equity markets have been at their volatile best, infrastructure funds have suffered more than their diversified peers. Sure, 6 months wouldn't necessarily qualify as a long-enough time frame, but the performance is indicative of the inability of infrastructure funds to protect investors interests on the downside.
 

• Thematic funds: They are a changing!
   

  Volatility
  Standard Deviation measures the risk that the fund has exposed its investors to. On this parameter, infrastructure funds are comfortably outscored by diversified funds. None of the infrastructure funds can hold a candle even to the worst performer among the diversified funds i.e. DSP ML Top 100 (7.93%).

  The higher risk that infrastructure funds expose their investors to is evident. But then, has the higher risk translated into commensurately higher returns? Let's find out.

  Risk-adjusted return
  Sharpe Ratio is a measure of returns delivered by the fund per unit of risk borne. And yet again, infrastructure funds are found wanting as compared to the diversified funds. Funds like DSP ML Top 100 (0.33%) and Fidelity Equity (0.31%) score over their peers from the infrastructure funds segment. In other words, infrastructure funds have failed to adequately compensate investors for the risk levels they have been exposed to.

  In a nutshell¦
  The performance on risk parameters only highlights the typical high risk-high return investment proposition offered by thematic funds (like infrastructure funds). So long as the underlying theme experiences a purple patch, they are capable of delivering superlative performances. However, once the tide turns (which is an eventuality as every theme is bound to run out of steam at some point in time), the inherent inadequacies in their investment proposition stand exposed.

  What investors should do
  Our advice for investors remains unchanged. We have always maintained that over longer times frames (at least 3-5 years) well-managed diversified equity funds are likely to score over thematic/sectoral funds on the risk and return parameters. The latter are at best suited for risk-taking and informed investors who can time their entry into and exit from the fund. For others, diversified equity funds are likely to be the best bets.

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