Why you must invest in infrastructure funds

Mutual funds constantly come out with different schemes. A lot has been written about large cap funds, mid cap funds, small cap funds and various sectoral funds, but not much is known about infrastructure funds and their performance.

Infrastructure funds are part of a mutual fund category called thematic funds.

While sectoral funds invest in particular sectors like, say, information technology, power, metals, oil and gas, etc, thematic funds invests in themes like infrastructure, consumption-led categories like the retail industry and outsourcing companies.

Today, there is a huge buzz about the Great Indian Gold Rush and its three themes -- infrastructure, consumption and outsourcing.

Of these three, infrastructure funds have caught the fancy of a lot of mutual funds; many new funds have been launched in this category in the last couple of years.

But there are only five that have a sizeable money under management; and these five were launched before 2006:

These funds include:

1.DSP ML TIGER Fund

2. Prudential ICICI Infrastructure Fund

3. Tata Infrastructure Fund

4. UTI Thematic Infrastructure Fund

5. Sundaram BNP Paribas Capex Opportunities Fund

~ These are are open-ended funds; this means you can invest in them whenever you like. We expect some more infrastructure funds to hit the market but most of them would be close-ended (in open-ended funds, investors are free to sell their units anytime; in close-ended funds, investors cannot sell their units for a minimum period of time -- this minimum period is decided by the fund).

~ Infrastructure, as a theme, covers several sectors like power utilities, power equipment and construction companies. Unlike technology sector mutual funds (at best, technology sector funds could buy stocks from telecom and media besides the software stocks it traditionally invests in), infrastructure funds are not restricted to a few sectors.

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~ If we do an analysis of variety of stocks owned by the infrastructure funds, you will notice that most of these funds own same stocks. For example, all the funds in this category have invested in Reliance. For four of the five funds, Reliance is their preferred stock and has the highest investment as compared to the other stocks they have put their money in. 

~ Some schemes, though, have concentrated holdings (this means they have invested in a fewer number of stocks, but have put more money in each stock) than the others. Prudential's infrastructure fund, for example, is the most concentrated with as few as 34 stocks. Tata and DSP ML's, in this order, are the most diversified and have more number of stocks.

~ The common stocks that most of these infrastructure funds have invested in are Reliance, BHEL, Bharti and ONGC; Sundaram, in fact, is the only fund that does not have Bharti and ONGC in its portfolio.

~ No mutual fund invests its corpus -- this is the total amount it has available for investment -- at one go. It always holds some of this money as cash so that it can buy stocks from good companies in case the stock market crashes. 

The flip side, however, is when the market does not crash, these funds remain idle. That is, they don't earn any returns, which is the reason why investors put their money in mutual funds in the first place. The performance of such funds suffer if funds remain idle.

In terms of cash holding (this refers to the amount of money a fund prefers to keep as cash) Prudential ICICI holds 16 per cent of its funds in cash. Tata has at 10 per cent of its funds in cash and DSP ML has 5 per cent of its funds in cash. 

~ The first three funds are well diversified across different sectors and have more stocks belonging to the capital goods, housing and construction sectors. They also have banking stocks such as HDFC Bank, ICICI Bank and others. However, banking stocks do not find any place in Sundaram and UTI's portfolio. 

Although in small quantities, it's surprising to see non-infrastructure or not even closely linked stocks such as TCS, HLL and HCL in Sundaram's CAPEX portfolio inspite of it being an infrastructure fund. 

Here is the one-month rolling returns of the 5 infrastructure funds in the last one year

The monthly rolling return gives you a sense of what you would have earned if you had invested a certain sum of money from May 10, 2006, to June 9, 2006, then from June 10 to July 9, July 10 to August 9 and so on till April 10, 2007, to May 9, 2007.

This is the monthly returns of the last one year. 

Source www.mutualfundsindia.com

As can be seen from the rolling one month return as on May 10, 2007, DSP ML T.I.G.E.R Fund has the lowest standard deviation; hence, it is the least volatile of all the five funds. To understand standard deviation better, read How SIPs help you invest wisely.

Prudential ICICI, on the other hand, scores high on the returns front (average rolling monthly return of 1.82 per cent). At the same time, it is also very volatile (as indicated by its standard deviation of 9.07). On the other hand, DSP's TIGER is number 2 on a monthly return basis (1.70 per cent), with the lowest volatility (standard deviation of 8.84).

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Even those of you who are pessimistic will accept that the 8.5 to 9 per cent GDP growth over the last few years clearly indicates how strong our economy is. At the same time, this economic growth also brings home the reality that India's mediocre physical infrastructure (poor roads, undeveloped ports and airports, poor railway connectivity) is one of the key factors impeding the country's development.

It is heartening to note that things are changing, albeit at a slower pace. The Planning Commission has shown its determination to push up the infrastructure spending. The approach paper of the XI 5-year plan (Indian economy is a planned economy and targets are set and investments are made accordingly in these five year plans) has proposed investments to the tune of $320 billion in infrastructure. So the opportunity is huge, even if we consider a fraction of this to trickle down as investments.

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Despite several hiccups, including the lack of political will, one can expect infrastructure investments to pick up in the coming years. This will bode well for several sectors such as engineering, capital goods, power, telecom, ports, urban infrastructure, aviation and construction companies. It will also bode well for funds with dominant infrastructure themes.

Though riskier than diversified equity funds, an investor with a high-risk appetite can look at allocating around 10 per cent of her/ his portfolio to such funds. However, make sure that even within infrastructure funds, you opt for less volatile funds that are well diversified across various sectors.

Amar Pandit is a certified financial planner and runs the Mumbai-based firm My Financial Advisor.