75% returns in one year. Should you invest in infrastructure funds?

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With 74.40% average returns in one year, infrastructure funds are among the toppers on the return charts. This boom can be attributed to increased government focus and spending in the sector. Many fund houses are asking investors to relook at the thematic funds investing, specifically in infrastructure stocks. The question is should retail investors bet on these sector funds and if yes, how much?

The government has given a clear priority to infrastructure spending. The National Infrastructure Pipeline (NIP) is the government’s effort to augment India’s infrastructure through an identified investment of Rs 111 Lakh crores between FY 2020-25. According to a note published by Invesco India Mutual Fund, the share of capital expenditure going up lays the foundation for subsequent years’ economic growth. Sectors such as roads, railways, water witnessed a sizable increase in allocation for FY22. Government is increasingly stepping up investment in the infrastructure sector and looking towards private sector participation. This, coupled with attractive valuations makes infrastructure funds a lucrative option.

Infrastructure index is currently trading at a discount relative to Sensex. “Valuations of Infrastructure index trade not only at a “higher discount” its 6-year average differential with Sensex but also to its own 6-year average PE multiple. This, to our minds, does not capture the upcoming improvement in earnings growth – which may offer an opportunity to investors to generate superior returns, as was seen in the past cycle of 2003-08,” says Amit Nigam, fund manager-equity, Invesco India Mutual Fund.

If one looks at the performance of infrastructure mutual funds, one can see the schemes are doing really well in the recent past. With the topper, Quant Infrastructure Fund is offering a whopping 117% returns in one year and five other schemes offering more than 80% returns in one year. However, the year-on-year performance of these funds show the cyclical nature of these sector funds. Most of the current toppers saw negative returns in 2015, 2016 and 2018.

Scheme name 1-year returns (%)
Quant Infrastructure 113.01
IDFC Infrastructure 99.62
HSBC Infrastructure Eqt 89.04
DSP T.I.G.E.R 85.39
Kotak Infra & Eco Reform 82.82

Mutual fund advisors believe that investors should understand that infrastructure funds are highly tactical and if one has to take tactical bets, it should be timed very well. “Sector schemes are cyclical, but infrastructure cycles are longer than other sectors. Another issue with infra in India is that even though the spending has increased, projects stalling is always a possibility. Many new projects are facing troubles because of non-compliance with environmental norms. The memories of 2007-2008 are still fresh. Hence, I think for smaller investors I would say it is too risky to bet on an infra specific scheme. However, one can look at diversified funds. Fund managers never miss an opportunity to allocate to upcoming and better performing sectors in those funds,” says SR Srinivasan, Founder, SriNivesh, a financial planning firm based in Chennai.
If you want to take the risk and make a tactical allocation to infrastructure funds, you must stagger the bets to reduce risk. “Investments in thematic funds have a potential to earn superior returns, however, are usually associated with higher volatility. Hence, we recommend our investors to invest through systematic investment plans (SIPs),” says Amit Nigam.

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