Suitable for high risk-takers: Go for staggered bets in infra funds – Money News

Individuals with an aggressive risk appetite should invest in infrastructure funds in a staggered manner. They should ideally hold these funds for over five years to earn higher returns, say experts.

The total assets under management of infrastructure thematic funds is Rs 40,000 crore and the theme has beaten broad benchmarks by more than 10-15% on a three-year basis. In the last one year, some infrastructure funds have given returns of over 80%.

For instance, Bandhan Infrastructure Fund and LIC Mutual Fund Infrastructure Fund have given 84% and 83.5% returns, respectively. Over a three-year period, ICICI Prudential Infrastructure Fund and LIC Mutual Fund Infrastructure Fund have given 39.2% and 37.4% returns, respectively.

The Budget for this year has allocated Rs 11.11 trillion for capital expenditure, which is equivalent to 3.4% of GDP. It also encourages private sector participation through viability gap funding and enabling policies, further accelerating the growth of infrastructure projects. The strong multiplier effect of infrastructure investment can drive economic activity and create jobs.

While certain segments may face saturation, the overall infrastructure space still holds significant growth potential driven by strategic initiatives and emerging market needs. However, infrastructure funds have become quite pricey and may have gone beyond their optimal value.

Nirav Karkera, head, Research, Fisdom, says while the sector appears attractive, current valuations are rich, and earnings need to catch up to justify these valuations. “We recommend a diversified approach with some orientation towards infrastructure stocks, providing balanced exposure while mitigating risks associated with over-concentration in a single sector,” he says.

Hold for a long time

Infrastructure investments typically involve large-scale projects such as highways, bridges, airports and industrial parks which take considerable time to plan, execute, and become operational. The benefits of these projects, in terms of increased economic activity and improved efficiencies, are often realised gradually over several years.

Soumya Sarkar, co-founder, Wealth Redefine, an AMFI registered mutual fund distributor, says investors should consider a holding period of over five years to potentially realise higher returns. “This long-term horizon helps to mitigate the volatility and allows investors to benefit from the long-term growth trajectory of the infrastructure sector,” he says.

Infrastructure funds, being sectoral themes, are also characterised by high risk and high returns. Historical data, such as the performance during the 2008 financial crisis, shows that infrastructure funds can take significant time to recover from downturns. Due to the cyclical nature of infrastructure investments, there can be extended periods of drawdown.

Points to watch out for

When investing in infrastructure funds, investors must consider several key factors to make informed decisions. For one, these funds are highly cyclical in nature which means their performance is closely tied to the economic cycle, with periods of strong growth often followed by downturns. “Investors should be prepared for these fluctuations and understand that the value of their investments may vary significantly over time,” says Karkera.

These funds primarily invest in infrastructure-related companies and do not diversify into other sectors like IT or banking. This focus can lead to substantial gains but also significant losses if the sector underperforms. Moreover, their performance is closely tied to government spending and economic conditions. Any sudden drop in infrastructure revenue or spending can negatively impact the fund’s performance.

Lokesh Manik, senior equity research analyst, Vallum Capital Advisors, says investors must evaluate the churn and Sharpe ratio of the fund and choose superior ratios. “Investors must see the track record of the fund house if they are raising excessive money at the adverse cycle of the markets,” he says.

While the sector’s growth prospects remain robust due to ongoing government support, investors must be discerning and selective about their investments. “The saturation in the sector could lead to tighter margins and increased competition among infrastructure companies,” says Sarkar.