For any growing economy, investments in infrastructure are the key to future growth. It is estimated that high quality infrastructure in the form of quality roads, highways, inland waterways, ports and airports will boost the GDP growth by 1.5-2.0% annually. That means India’s annual GDP growth could shoot up from 7% to 8.5% in real terms. The growth of the miracle economies of South East Asia like Hong Kong, Singapore, Taiwan and later China were predicated on investments in high quality infrastructure. India needs to invest nearly $1 trillion into infrastructure projects to bring Indian infrastructure up to Asian peers. That is not only a huge investment but also a huge opportunity for companies in the infrastructure space; especially those who are operating toll roads, building highways, bridges and ports, installing power plants etc.
An infrastructure fund is a mutual fund that intends to leverage on this particular segment so as to derive the benefits of growth in infrastructure to the maximum hilt. Infrastructure investments in India can be postponed but they cannot be avoided. That is the bet for infrastructure funds. So should investing in infrastructure funds be a major option? Should you invest in infrastructure funds and firstly why invest in infrastructure funds?
Assessing the performance of Infrastructure Funds in India:
One of the major outperformers in the last few years has been the infrastructure funds that have leveraged on the infra sector growth. The table below features some major infrastructure funds in India with an AUM in excess of Rs.1000 crore. It is evident that most of the infrastructure funds have been outperformers over the longer period.
Fund Name1-Year Returns2-Year Returns3-Year Returns5-Year ReturnsReliance Divers Power Fund13.7%28.7%16.6%18.2%UTI Infrastructure Fund6.7%19.9%9.3%14.8%ICICI Pru Infra Fund9.5%19.3%8.8%15.8%L&T Infrastruct. Fund19.4%31.9%18.9%24.7%DSP Blackrock Tiger Fund10.9%22.7%12.3%18.4%HDFC Infrastruct. Fund3.7%15.4%6.1%14.5%
Data Source: Moneycontrol
The big question is, therefore whether it is time to invest in infrastructure funds from an 8-10 year perspective?
6 ground rules to know before investing in infrastructure funds..
1. Infrastructure projects have two typical features viz. they are long gestation projects and they are largely subjective to government controls. Therefore, you need to look at a realistic time frame of 7-8 years to gain reasonable returns in the infrastructure space. That is the kind of time frame your infrastructure fund will also require to delivery above market returns.
2. At the end of the day, infrastructure fund are thematic funds so at best they can be an extension to your core equity exposure to diversified equity mutual funds. For example, keep your exposure to infrastructure themed funds at around 10-15% of your total equity corpus and don’t let your exposure to a single theme go beyond that. You still need to look at it from your overall financial planning perspective.
3. There is a big gap between opportunity and actual performance. Infrastructure sector may be a big opportunity but not all infrastructure companies will actually be profitable and generate shareholder returns. You need a fund that is quick to identify these companies and bet on them. That is where the track record of returns matters a lot and can be an important input for the investor while investing in the fund.
4. Infrastructure by its very nature will be a volatile sector and therefore even the returns on the infrastructure sector fund will be volatile. Therefore, the best way to take advantage of this volatility is to adopt a phased approach to investing. Ideally, do a systematic investment plan (SIP) on these infrastructure funds so that over a period of time the volatility works in your favour and your cost of holding is reduces substantially.
5. Take a holistic view on infrastructure. When you are making a financial plan you invest in equity and debt funds to manage your wealth creation needs and your regular income needs. When you consider your exposure to infrastructure, take the combined exposure to equity and debt as that reflects your total infrastructure related risk in the portfolio. Keep an outer limit for your overall exposure to infrastructure to contain thematic risk.
6. When it comes to infrastructure, there is a wide gamut of ways to take exposure to this sector. You can buy equity funds that are infrastructure focused. Alternatively, you can also buy tax saving bonds and tax rebate bonds that invest in the infrastructure space. These are quite attractive in post tax terms. Lastly, there are new opportunities in the form of InvIT (Infrastructure Investment Trusts) which are a quasi debt and quasi equity investment in infrastructure. Infrastructure exposure through all these methods can be quite impressive. Take a comparative view after considering all options.