Pradeep Gaur/Mint
Pradeep Gaur/Mint

Infrastructure funds make a comeback

Invest in funds that have a clear definition for what they see as the infrastructure sector

Perhaps the sharpest thorn in a mutual fund (MF) investor’s side—and many have put up with it for the past six-odd years—is now turning out to be a useful addition.

Infrastructure funds, which were languishing since 2008, are back with a bang. In the past one year alone, infrastructure schemes have returned 35%, outperforming diversified equity funds, which returned 24%. Just a year back, the 1-year return by infrastructure funds stood at 9%, as against diversified equity schemes’ 22%.

Things started to turn around in the infrastructure fund space early this year as the expectation of a new government started to set in. Even the broader market has risen by a wide margin. The S&P BSE Sensex has risen by 16% since the start of the year.

“We are very bullish. The opportunity size of the infrastructure segment is huge. As of today, there are stalled projects in the range of $150-160 billion; that’s roughly 8% of India’s gross domestic product (GDP). Of this, just 30% projects are in the power sector. So that’s the opportunity," said Yogesh Bhatt, senior fund manager, ICICI Prudential Asset Management Co. Ltd.

Bhatt added that the architecture of the newly elected National Democratic Alliance government appears to be one that would clear pending projects faster.

“The government appears to be talking about deemed clearances. This means if a bureaucrat or an official in charge is ‘sitting’ on a file for, hypothetically speaking, six days, the file would automatically move to the next level. Also, although ministries would be headed by their respective ministers, the officials below would be answerable to the Prime Minister’s Office. That ought to bring in more accountability, and most importantly, people won’t be allowed to sit on files and projects would be move ahead, faster," he added.

But that’s a bit in the future. At present, the question for investors is whether to book profits or invest more now that infrastructure funds are back in the profit zone?

“We are seeing a slight positive update because of political stability. With better governance and reforms, the (infrastructure) sector could be among the top performing ones in times to come," said Soumendra Nath Lahiri, head-equity, L&T Investment Management Ltd, adding that investors must have a time horizon of 3-5 years.

What should you do?

For existing investors, book profits in part if you need the money. However, it’s best to stay invested for the next 3-5 years. Fresh investors should pick a fund that defines infrastructure well and also how much of its portfolio actually goes into infrastructure stocks. A few infrastructure funds invest in private sector banks that have very little to do with the infrastructure sector and are mostly focused towards retail finance.

Some, like HDFC Infrastructure fund, has also invested 5.2% in Infosys Ltd, a technology company as per its April 2014-end portfolio. Some of these infrastructure funds say that they will invest up to 65% or 70% in infrastructure-related sectors and the rest in other companies. An Infosys or a private sector bank, falls under this “other" bracket.

We suggest that you avoid these types of funds and stick to those that clearly define what they see as the infrastructure sector.