Should You Bet On Infrastructure Funds Again?
May 15, 2019

Author: Aditi Murkute

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Infrastructure sector directly contributes to the growth story of Indian economy. Increased spending backed by government reforms/policies invigorates the country's overall development in terms of better roads, transport ways (railways, airports, highways), ports, power & energy, and rural & urban housing. Basically, an uptick in infrastructure shows signs of upliftment in the lives of citizens' comfort and boosts the economy.

Recently IBEF, reported...

'In 2018, India ranked 44th out of 167 countries in World Bank's Logistics Performance Index (LPI) 2018. Foreign Direct Investment (FDI) received in Construction Development sector (townships, housing, built up infrastructure and construction development projects) from April 2000 to December 2018 stood at US$ 24.91 billion, according to the Department of Industrial Policy and Promotion (DIPP). The logistics sector in India is growing at a CAGR of 10.5 per cent annually and is expected to reach US$ 215 billion in 2020.'

Albeit, a large part of the Infra sector in India is linked to government spending requires a steady flow of liquidity.

In the Interim Budget 2019, presented by Mr Piyush Goyal, proposed Rs 4.56 lakh crore (US$ 63.20 billion) for the sector; out of which, for railways it proposed at Rs 64,587 crore in 2019-20.

Schemes like Udaan, Housing for All, and Digital India are driving the infrastructure sector. But the debt overruns and project delays are indicative of stagnation.

Despite the public-private partnership and increased spending for uplifting the sector or fast-tracking various projects of highways, airports, etc. the sector has witnessed a subdued performance.

Besides, the liquidity is tight and depends on the interest rate for borrowing of funds. Currently, though easing of RBI's monetary policy has potential to support growth, the recent cuts in repo rate are yet to transmit to the weighted average lending rate of banks; thus, the effects of the easing on investment activity are yet to be manifested.

Graph: Repo rate

(Source: Department of Economics Affairs Ministry of Finance Monthly Economic Report March 2019)

Another point to note is that the Infrastructure sector is cyclical is nature, so when the rates are up, the borrowing cost goes up, which in turn slows growth and vice versa.

In terms of investment...

Year 2018 was not a favourable year for Infrastructure sector, but mutual fund managers are optimistic of the future.

Speaking to Economic times, "We have seen a fair amount of activity, in terms of tenders as well as awarding, over the last 10 months. We have close to six lakh crores of tenders on the block which is roughly similar to what we had in the previous year. This number used to be less than three lakh crores probably three years back," says Bharath S, fund manager-Equity, Sundaram Mutual. .

Further he adds, "Private sector capex has been relatively benign in the last three four years. Larger industries like cement, power and steel which were laggards in the last four years have just started seeing some capex activity. When this starts picking up in the full-blown manner, a year down the line that will be much big leeway for companies in the capital goods and infra space."

Investing in an infrastructure fund means investing in a sectoral fund that will invest in equities of construction companies, cement companies, steel companies, and other companies related to infrastructure with an aim of capital appreciation.

But a sectoral fund has its own limitations.

Any government reform addressing the sectoral issue can have a bearing effect on the overall sector. Plus, currently, there isn't a proper benchmark for the sectoral fund in place

For example, a fund with a focus on rural development cannot have a benchmark such as Nifty 500. If a thematic fund is benchmarked with any other generic benchmark, the comparative analysis would not hold weight. Many thematic funds have this issue.

Most of the sector funds tend to gain more during the upswing of the equity markets; whereas during the downswing of the equity markets, they plunge more than the other market cap funds.

Table:How have some infrastructure funds fared?

Scheme Name 1 Year absolute returns (%) CAGR (%)
3 Years 5 Years
Aditya Birla SL Infrastructure Fund -12.51 14.76 15.34
BOI AXA Mfg. & Infra Fund 3.36 14.46 20.41
Canara Rob Infrastructure Fund -5.19 14.30 12.22
Franklin Build India Fund -6.17 13.94 12.69
HDFC Infrastructure Fund -10.86 13.47 12.00
HSBC Infra Equity Fund -19.06 12.81 11.70
ICICI Pru Infrastructure Fund -6.28 11.11 9.90
IDFC Infrastructure Fund -9.67 10.72 13.76
Invesco India Infrastructure Fund -7.50 10.30 9.41
Kotak Infra & Eco Reform Fund -12.77 10.12 11.26
Average of Infrastructure Funds -11.16 10.28 11.51
Average of diversified equity funds -3.76 11.77 13.29
NIFTY INFRA – TRI -7.93 7.01 3.07
S&P BSE 100 – TRI 3.19 14.02 11.14
NIFTY 500 – TRI -0.71 13.25 11.82
For illustration purpose only
Data as on May 14, 2019
(Source: ACE MF)

From the table, one can see the performance of top 10 funds have manged to outperform the benchmark for over a period of five years. So, one must consider the investment risk and investment time horizon before investing in an Infrastructure fund. Besides, infrastructure funds fall under an extremely-high-risk, high return spectrum and might cost you adversely if the sector is underperforming.

But if you notice, the average returns of the infrastructure sector, has faultered for the same time frame as compared to the average returns of the diversified equity funds.

When you invest in a portfolio of diversified equity funds, you are investing across market cap and sector. The diversification helps in mitigating the downsides of any sector and provides better returns. It would be prudent to invest in diversified equity funds in congruence to your risk profile and your investment time horizon.

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