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Shyamal Banerjee/Mint
Shyamal Banerjee/Mint

Rethinking infrastructure funds?

Here is what you need to know before investing in an infrastructure fund

Infrastructure funds have actually completed a decade of existence. UTI Infrastructure and DSP BlackRock TIGER funds fall in this category, while Tata Infrastructure will do so later this year. The recent returns of the funds in the infrastructure category are nothing short of impressive. HDFC Infrastructure, Escorts Infrastructure and L&T Infrastructure top the one-year return list with returns above 70%. In fact, as of 1 July, there are 11 funds that have delivered one-year returns above 60%. It is the (long awaited) revival of this category that has caught investors’ attention. And this is where investors are getting completely carried away.

I understand savvy investors looking at sectoral plays such as information technology (IT), fast-moving consumer goods (FMCG), pharma or banking. They would logically gravitate towards such sector funds when the relevant stocks have been beaten down and they feel a revival is in place. Since the exposure is high to a focused set and limited number of stocks, it is easy to ride such a wave. Unfortunately, investors superimpose the same logic when it comes to investing in an infrastructure fund. But here is why you cannot think on those lines with a thematic play.

Differing views

The fundamental issue with infrastructure funds is that the theme is extremely vast and extends over numerous sectors. To further add to the perplexity, there is no standard definition as to which sectors comprise infrastructure.

A while back, the Insurance Regulatory and Development Authority (Irda) stated that it would align its definition of infrastructure with that of the Cabinet Committee on Infrastructure. The Reserve Bank of India (RBI), the Securities and Exchange Board of India (Sebi), Planning Commission, Pension Fund Regulatory and Development Authority (PFRDA), and the Income-tax department—all have different definitions as to what constitutes infrastructure.

A natural extension would be that individual fund managers would concoct their own definitions too. I know of at least one asset management company that goes by the Planning Commission’s definition. Others tend to essentially look at the obvious such as construction and capital goods. They then use their discretion regarding industries or sectors that are indirectly linked to the creation of infrastructure or benefit from its growth.

But by and large, pharma, FMCG and IT would generally not be found in an infrastructure fund. Do note, I stated “by and large" and used the term “generally". Let me tell you why.

I have seen pharma being included in the portfolio of an infrastructure fund on the premise that healthcare is a part of the overall infrastructure of a country. I have also seen education stocks be part of such a portfolio since education, too, could fall under the ‘infrastructure’ of a country.

Some believe that oil production and exploration firms should not be included in the definition of ‘infrastructure’ since these are more users of infrastructure rather than contributors. A contradicting view is that they must be included since it requires investment in complex, long-lasting and huge amounts of infrastructure.

Most funds also invest in banks since some of them have sizeable exposure to infrastructure projects. HDFC Infrastructure Fund has State Bank of India, ICICI Bank Ltd, Bank of Baroda Ltd, Federal Bank and Punjab National Bank in its portfolio. But there will be other funds that are not inclined towards banking stocks in their infrastructure portfolio.

HDFC Infrastructure Fund also has Infosys Ltd (IT) and Wonderla Holidays Ltd (services), while L&T Infrastructure Fund has Blue Dart Express Ltd (services).

The point I am making is that since there is so much ambiguity in what constitutes infrastructure, it is difficult for investors to actually narrow down on a “pure infrastructure" fund—if such a product actually exists.

What does one do?

I am not advising you to shun infrastructure as a theme, especially since it is poised to take off with the new government promising to deliver on that front. If you want to take a specific exposure in your portfolio to a fund focused on such a theme, do go ahead.

The crucial factor will be deciding which fund to opt for. Start by evaluating the fund on general parameters. Since there is no “pure infrastructure" fund, look at the fund manager’s view on cash, how concentrated the portfolio is, whether the portfolio tilts towards large-caps or smaller fare, the turnover ratio, the consistency of performance vis-à-vis its peers, volatility and expense ratio.

When you finally zoom in on a few that meet your selection criteria, read each of the fund’s prospectus to look at the investment mandate. That will give you a clear indication as to whether it has a more narrow focus than the other infrastructure funds or is just a guise for another diversified equity fund.

Aditya Agarwal, managing director, Morningstar India.

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