Individuals are increasingly investing in infrastructure funds as India is at the initial phase of a cyclical economic recovery led by government investments. While India’s overall investment rate had declined sharply in the past few years dragged down by declining household and private sector investment, there are signs of a revival, especially in household investment in the residential real estate sector.
Anand Vardarajan, business head, Banking, Alternate Products & Product Strategy, Tata Mutual Fund, says the infrastructure sector looks well-poised for an upcycle as the growth in the gross fixed capital formation which had seen a dip in the last few years is now showing signs of revival. “Many sectors are now back to, or beyond pre-Covid levels which augurs well for sustained growth. In this context there will be a need for additional capacity. Hence sectors like capital goods, construction, realty, etc., could benefit, which basically constitute the infra sector,” he says.
Experts say India is at the initial phase of a cyclical economic recovery and the improved affordability in the housing sector after many years of minimal increase in housing prices could lead the real estate sector to clock reasonable sales despite the recent rate hikes. George Thomas, fund manager, Equity, Quantum AMC, says order books of capital goods companies remain at healthy levels indicating a potential revival in capex demand. “Capacity utilisation of the manufacturing sector is persisting above 70% in recent times which points to a potential revival in private capex,” he says.
Investors should note that infrastructure funds are part of sector-based investment. There have been occasions when a particular theme or sector would do well for some time and then may trail if the environment is not good for the sector and infra funds are no exception.
Harshad Chetanwala, co-founder, MyWealthGrowth.com, says, the cyclic nature of these funds should be an important factor one should keep in mind. “While infrastructure has a long way to go in India and does have the potential to do well there are certain factors like government policies, focus on infrastructure projects and spending that also have a role to play,” he says.
Like all thematic funds, there are certain risks in investing in infra funds. Apart from the concentration risks, thematic funds are cyclical that can go through multiple cycles of ups and downs and the returns would depend on the economic cycle and the entry point.
Individuals must note that as equity-related investing is all about the additional risk one takes to generate additional returns. So, one must know the risk factors along with the return potential.
“Infra as a sector has long cycles. It may test the investor’s patience for some time but when it performs, it may be quite gratifying. The sector had a great run around the 2006-08 period and subsequently around 2014-15. As an investor one has to be mindful that it is a sector fund and hence could be more volatile than a diversified equity fund,” says Vardarajan.
Timing the entry and exit will be a crucial factor in terms of returns from funds based on specific themes. In fact, specific sectors could be out of favour for long periods when returns could be sub-optimal. “Diversified funds tend to provide a reasonable investor experience over the long term. Investors could consider diversified funds for their core allocation and limit the exposure to thematic funds,” says Thomas.
SIP or lumpsum
Ideally, investors should stagger their investments into infrastructure funds by doing systematic investment plans. Moreover, those looking to invest just in the companies within the infrastructure sector may look at an index fund, as there could be a possibility of active funds investing in other companies which may have an indirect role in infrastructure development.
In infrastructure funds, investors will see more volatility compared to other diversified equity funds as the investment in other funds is across different sectors. “Ideally, one should not go overboard with thematic funds and may like to invest some part of the portfolio with the majority being in diversified funds,” says Chetanwala.
Infrastructure sector has long cycles and can test the investor’s patience
Besides concentration risks, there is also more volatility in such funds due to multiple cycles of ups and downs
Timing entry and exit is a crucial factor for funds based on specific themes
Stagger investments in infrastructure funds via SIP