Are you ready to jump on the infrastructure fund wave?

 

India’s infrastructure scene is booming, with a record-breaking budget of over ₹11 lakh crore set aside for growth in FY25. This has naturally caught the attention of investors looking to cash in on this exciting sector. Infrastructure mutual funds could be a great way to ride this wave, but let’s take a closer look before you dive in.

Where do infrastructure funds invest?

We’re talking about more than just roads and bridges! Infrastructure funds spread their investments across diverse sectors like transportation, energy, water and sanitation, communications, and social and commercial infrastructure. It’s a broad play that captures a lot.

How many infrastructure funds are there?

Currently, there are 16 sectoral and thematic infrastructure funds in the game. Two are passively managed and track the Nifty Infrastructure Total Returns Index (TRI). The rest are actively managed and benchmarked against the Nifty Infrastructure TRI and the BSE India Infrastructure TRI.

What are the risks involved?

  1. The Theme may be loosely defined: Fund managers might invest in sectors only loosely related to infrastructure (think automobiles, financials, capital goods). This means some funds might hold less than 10% in pure infrastructure companies, making them misleading.

  2. High capital intensityInfrastructure-heavy sectors require significant capital investments and often operate on thin profit margins with high levels of debt, which can make them vulnerable to defaults.

Past Performance:

 

What You Need to Know

The past performance of infrastructure funds doesn’t always paint a clear picture. Why? Because these funds don’t stick exclusively to companies deeply rooted in the infrastructure theme. Four out of the top five funds (in terms of assets under management) had significant investments in sectors that are not strictly part of the broad infrastructure space over the last five years.

When you compare their performance with the S&P BSE 500 Total Returns Index (TRI), you’ll see that these funds have mostly underperformed over the last 10 years. The performance gap was even wider in the previous decade (2004-2014)

 

What’s the takeaway?

Some infrastructure funds may not give you the returns you expect, especially if they’re straying from core infrastructure investments. Make sure to look closely at the fund’s allocation and past performance before making any decisions.

 

What should you do?

  1. Know your risk appetite: Infrastructure sectors can be cyclical and volatile. Make sure your investment aligns with your goals and comfort level.

  2. Watch out for high debt: Ancillary sectors like aviation, real estate, and power often carry heavy debt and financial stress.

  3. Be wary of diversification: Fund managers might include loosely related companies to balance out the portfolio, which can dilute the fund’s thematic focus.

  4. High concentration warning: Sectoral and thematic funds come with higher risk due to focus on a single sector. Proceed with caution.

While the idea of investing in infrastructure can be appealing, it is important to assess the risks and challenges. Ensure that the fund aligns with your investment strategy and risk tolerance. By investing wisely, your returns will thank you!

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