Infra Funds: Growth ahead

Before the global financial crisis hit the markets in 2008, investors had been bitten by the infrastructure bug. New fund launches garnered a large amount of money. In February 2008, 17 infrastructure funds had raised Rs 25,000 crore from the market. The first few months of that year saw most of these funds clock returns of 60-70 per cent on an annual basis.

However, since the fall of the market and its subsequent rise in 2009, investors have shunned infrastructure funds because of the sharp decline in their valuations and subdued returns. In the past year, these funds have clocked returns of 20 per cent on an average, compared with 29 per cent delivered by the Sensex.

The top performing sectoral funds - FMCG or fast-moving consumer goods, pharmaceutical and banking - have returned almost 50 per cent during the period. "The infrastructure theme was overplayed in the earlier cycle, which led to a high valuation of the sector," says Sadanand Shetty, Vice President and Senior Fund Manager (equity), Taurus Mutual Fund. "Although these funds are diversified in nature, their core holdings are in categories such as energy, power, construction, capital goods, metals and telecom. These sectors were hit more during the global financial crisis due to project cancellations and execution delays."

Most of the top holdings in these funds are still struggling to surpass the peak prices they had achieved in January 2008. BHEL and L&T, for instance, are trading below the prices that they were at in January 2008, Rs 2,297 and Rs 1,939 respectively, while Tata Steel (Rs 644) is trading at more than 30 per cent below its peak.

Road to recovery

Revival Signs: The infrastructure sector is likely to see better times ahead.

While infrastructure funds are currently lagging behind the market, the outlook for them is slowly improving. The government is aiming for a growth rate of over nine per cent. In budget 2010-11, it has allocated Rs 1.74 trillion to the infrastructure sector, which is 46 per cent of the total outlay. The allocation to roads has been hiked by 13.6 per cent to Rs 19,900 crore. The increase in industrial capital expenditure, awarding of road contracts by the National Highways Authority of India and bulging order books of EPC (engineering, procurement and construction) companies are expected to catalyse growth in the sector. The latest quarterly results hint at better times ahead.

"Given the liquidity in the system, the infrastructure sector will surely attract large investment," says Amar Ambani, Vice President (research), IIFL. Ports, roads, special economic zones, airports and power will remain essential to sustain a growth rate of over eight per cent, while sectors such as coal, gas and gas infrastructure are emerging as new investment themes.

Time to invest
Infrastructure projects usually involve long gestation periods. So, investment in this sector should have a horizon of at least three to five years, say analysts. Much like the other sectoral funds, these are also cyclical in nature. "Investors should hold on to these funds for another year or two. This may be a good time for new investments through SIPs," says Anil Rego, Chief Executive Officer, Right Horizons Financial Services.

It is important to choose an infrastructure fund with a consistent record as these funds have exhibited a large variation in returns. ICICI Prudential Infrastructure, Tata Infrastructure and DSP BlackRock T.I.G.E.R. have posted returns in excess of the broader markets in the past five years.

If you have just started investing in stocks and mutual funds, sectoral funds are not for you. Your exposure to sectoral funds should not be more than 20 per cent of the equity portfolio at any point, say advisers. "Given that sectoral funds come with a higher concentration of risk, it is better to hold more than one, say, a banking fund along with an infrastructure fund," adds Rego.

Courtesy: Money Today