Recently, the Securities and Exchange Board of India (SEBI) allowed mutual funds to invest in Real Estates Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). With REITs and InvITs being readied for launch, mutual funds may turn out to be one of the biggest participants in these public offers.
What are REITs and InvITs?
REITs or InvITs are entities that invest in rent-yielding assets and pay out dividends to their investors.
REITs own and then lease out real estate, whether commercial or residential. Investors are given units, similar to those in a mutual fund scheme. Units of the trusts will be traded on exchanges and will provide the investor with an option to exit, provided there are buyers available.
InvITs function in the same manner, except they own infrastructure companies (power generation, telecommunications, road construction etc.) instead of real estate. |
So, will spotlights turn focus on the infrastructure sector that was once a booming and much-loved amongst fund managers prior to the sub-prime mortgage crisis?
SEBI's decision to allow mutual funds to participate in these alternative investment products sparked a rally in real estate stocks.
Real Estate Stocks Rally
Returns expressed in absolute terms
(Source: ACE MF, PersonalFN Research)
On the day of the announcement, all the 10 components in the S&P BSE Realty index were trading in the green. However, the rally may lose steam as the REITs and InvITs are yet to be launched.
A slow start
SEBI cleared the norms for launching REITs and InvITs in 2014, but none of the big real estate owners progressed on creating trusts.
Two years later, in order to woo fund sponsors, SEBI eased the rules for REITs and InvITs allowing them to invest a larger portion of their funds in assets under construction, along with several other modifications to ease the registration process. Since then, six entities submitted a draft prospectus to SEBI expressing interest.
In October 2016, Embassy Office Parks, a joint venture between Bangalore-based real estate developer Embassy Group and private equity giant Blackstone Group, filed for REIT with SEBI, marking the first application by a developer for such listing. In the InvIT space, India Grid Trust filed its Draft Red Herring Prospectus (DRHP) with SEBI for a proposed Initial Public Offering (IPO) of as much as Rs 2,650 crore. The investment trust, sponsored by Sterlite Power Grid Ventures Ltd, owns inter-state power transmission assets in India.
Not to be left behind, Anil Ambani-led Reliance Infrastructure filed initial papers with the market regulator to raise Rs 3,000 crore through an InvIT. This made it the second firm to file the DRHP after Sterling Power Grid Ventures. Meanwhile, IRB Infrastructure announced that IRB InvIT Fund has filed the DRHP with SEBI for an Rs 4,300 crore IPO. Developers such as DLF, Raheja and RMZ too are in line for filing their offer documents.
So, will the infrastructure theme get a boost?
Over the past year, the Government has announced
several initiatives to boost the infrastructure sector. In the in Union Budget 2016-17, a record allocation of Rs 2.21 lakh crore was made for several infrastructure projects.
The Ministry of Road Transport and Highways plans to build five more Greenfield expressways across the country, which are expected to reduce travel time and propel economic growth. It also plans to upgrade India's airport infrastructure over a six-year period, and plans to set up 50 new airports over the next three years.
Government spending, along with investments from REITs and InvITs, is expected to provide a fillip to the currently cash-starved infrastructure sector. According to a joint report of Assocham and Crisil, REITs and InvITs can help raise close to Rs 50,000 crore in the near-term, given certain players' interest in the infrastructure and real estate space.
Good time to invest in infrastructure oriented mutual funds?
Mutual funds tend to capitalise on investment themes. When a sector is doing well, fund houses launch schemes revolving around that sector. Between 2004 and 2007, when the infrastructure sector was booming, fund houses rushed to launch infrastructure funds. However, as history has it, the investment theme failed to play out. Unfortunately, as the market tanked post-2008 (in the aftermath of the U.S. sub-prime mortgage crisis), investors who had bought these funds witnessed losses and some have not recovered yet. Many fund houses merged their infrastructure themed funds with other schemes, while others began diversifying their portfolio with stocks that indirectly associate with the infrastructure sector.
Infrastructure: A Once Booming Sector
Returns expressed in absolute terms
(Source: ACE MF, PersonalFN Research)
Currently, there are around 20 infrastructure-oriented funds. A peep into the portfolio of some of these schemes reveals that most of the schemes are not entirely infrastructure oriented. You would expect that the schemes would invest predominantly in companies from the construction, cement, steel and real estate sectors. However, most schemes have invested over 10% of their assets in financial sector.
How have Infrastructure oriented mutual funds fared?
| Scheme Name |
3 Years (%) |
SD (%) |
Sharpe |
| Franklin Build India Fund(G) |
31.56 |
19.78 |
0.31 |
| L&T Infrastructure Fund-Reg(G) |
28.37 |
23.56 |
0.24 |
| Kotak Infra & Eco Reform Fund(G) |
28.30 |
20.64 |
0.27 |
| Canara Rob Infrastructure Fund-Reg(G) |
25.42 |
21.81 |
0.23 |
| Sahara Infra Fund-Variable Pricing(G) |
25.35 |
24.73 |
0.21 |
| HSBC Infra Equity Fund(G) |
25.07 |
25.88 |
0.19 |
| Invesco India Infrastructure Fund(G) |
24.42 |
20.90 |
0.22 |
| Sahara Infra Fund-Fixed Pricing(G) |
23.38 |
24.74 |
0.19 |
| Birla SL Infrastructure Fund(G) |
22.82 |
21.98 |
0.19 |
| DSPBR India T.I.G.E.R Fund-Reg(G) |
22.82 |
22.84 |
0.19 |
| Tata Infrastructure Fund(G) |
22.78 |
21.04 |
0.20 |
| HDFC Infrastructure Fund(G) |
21.84 |
25.54 |
0.16 |
| SBI Infrastructure Fund-Reg(G) |
21.77 |
22.55 |
0.18 |
| Taurus Infrastructure Fund-Reg(G) |
21.56 |
22.53 |
0.18 |
| Sundaram Infra Advantage Fund(G) |
21.49 |
20.79 |
0.18 |
| IDFC Infrastructure-Reg(G) |
21.23 |
20.71 |
0.18 |
| BOI AXA Mfg & Infra Fund(G) |
20.03 |
20.78 |
0.17 |
| UTI Infrastructure Fund(G) |
19.92 |
23.19 |
0.15 |
| ICICI Pru Infrastructure Fund(G) |
18.91 |
22.85 |
0.15 |
| Escorts Infrastructure Fund(G) |
16.80 |
25.01 |
0.11 |
| LIC MF Infra Fund(G) |
13.54 |
20.32 |
0.09 |
| Benchmark |
| S&P BSE 200 |
12.86 |
15.22 |
0.10 |
| S&P BSE SENSEX |
8.25 |
14.37 |
0.03 |
| NIFTY INFRA |
6.33 |
23.53 |
0.01 |
Data as on January 23, 2017.
Returns are on a point-to-point basis, those depicted over 1-year are compounded annualised. Schemes sorted in descending order of three
-year return. Risk is measured by Standard Deviation and Risk-Adjusted Return is measured by Sharpe Ratio. They are calculated over 3-Yr period assuming a risk-free rate of 7.38% p.a.)
(Source: ACE MF, PersonalFN Research)
Although the returns clocked are quite wanting, the risk taken is higher compared to diversified equity funds, while some of the above schemes have held exposure to other sectors/themes as well.
It should be noted that infrastructure funds (and other sector-oriented / thematic funds) expose investors to concentrated risk as the fortune of the fund is linked to the undercurrents of the sector. Although Government spending and the investments of REITs and InvITs in the sector will give it a boost, it remains a tough job. Factors such as inflation, movement of interest rates, demonetisation and the crackdown on black money, would also determine the pace of infrastructural development in the country.
PersonalFN believes, sector and thematic funds are best avoided, unless you want to take greater risk while your core mutual fund portfolio is well in place.
To capture investment opportunities across market capitalisations and sectors, opportunities oriented mutual funds, can do good; because the fund manager holds a flexible investment mandate to do so. While you select a fund, choose one that has a proven track-record of generating consistent returns across diverse periods and market cycles. Further, ensure the fund is from the stables of a fund house which follows robust investment processes and systems. For an honest, unbiased outlook and recommendation on assets like equity, debt and gold, download
PersonalFN's Investment Guide for 2017. The guide will also provide the most optimum asset allocation and strategies that you can follow this year.
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