Why retail investors should take the mutual fund route to bet on infrastructure

NEW DELHI: After a horrendous performance—trailing five-year return of the CNX Infrastructure Index is -1.04%— the infrastructure sector is looking up. However, lacking expertise, retail investors should take the mutual fund route to bet on the sector.

Wide divergence in performance: The first thing that strikes you is the wide divergence in performance within the category over the past year. While the best-performing Franklin Build India has given a return of 40.68%, worst performer Sahara Infra has returned a paltry -2.38%. Two factors are responsible for this. One, the funds within this category have varied mandates.

"Some infrastructure funds’ mandates allow them to invest in a wide variety of sectors, while others have a narrower mandate," says Vidya Bala, Head of Research, Fundsindia.com. "Over the past one year, the funds with a wider mandate have done better than those with a narrower mandate," she adds.



Stock picking has also played a part. "Excess exposure to PSU banks and construction companies, which have fared poorly over the past year, is responsible for the underperformance of some of the largest funds in this category," says Anil Chopra, Group CEO and Director, Bajaj Capital. While funds that invested directly in construction companies fared poorly, those that put their money on proxy bets, such as cement, did well.

Choosing the right fund: When choosing a fund, look closely at its mandate. Some are pure play infrastructure funds while others have a wider mandate. Being more diversified, the latter will be less risky. But if you wish to go overweight on the infra sector, stick to the pure play funds.

Next, examine the fund’s portfolio. "Check which themes the fund manager is betting on," says Yogesh Bhatt, Senior Fund Manager, ICICI Prudential AMC. There should not be discordance between the fund’s name, its mandate and its portfolio. If the mandate says it is a pure play infrastructure fund, it should not go offcourse and invest in auto, pharma, IT, etc.

"Avoid funds that are not true to their mandate," says Bhatt. A pure infrastructure fund should stick to sectors like capital goods, engineering, roads, shipping and power. The fund’s benchmark will also give an indication of its nature. While some funds like Religare Invesco Infra and ICICI Pru Infra are benchmarked to the CNX Infra Index, Franklin Build India Fund is benchmarked to the CNX 500 Index, pointing to its wider mandate.

Compare the fund’s performance vis-a-vis its benchmark. Besides looking at trailing return, look for consistency in calendar year wise performance. Look at the fund’s AUM size. While the biggest fund, HDFC Infrastructure, has a corpus size of `1,971.67 crore, the smallest, Sahara Infrastructure, has a corpus size of only `5.20 crore. The risk of investing in a very small fund is that if the corpus does not grow, the fund house may shut down or merge the fund.

Points to remember: Infrastructure funds are thematic funds. They carry higher risk than diversified equity funds. This sector can suffer a prolonged downturn, as has been witnessed over the past five years.

In view of the risks, newcomers, conservative investors and small investors (with SIP of just Rs 5,000-10,000) should avoid these funds and stick to diversified funds. The fund managers of these diversified funds will take exposure to infra stocks when they feel their prospects are sound. Only seasoned investors, who already have a well-diversified portfolio, should invest in infrastructure funds. “Exposure to infrastructure funds should ideally be 5% of the equity portfolio and certainly not more than 10%,” says Chopra.

If you do choose to invest in infrastructure funds, follow a profit booking strategy. “Normally, mutual funds are long-term, buy-andhold investments. But if infrastructure funds have given high doubledigit returns within a year, book profits and move your money to diversified equity funds,” says Bala. Finally, since valuations within the sector are not cheap, take the SIP route and have an investment horizon of at least five years.