With the Union Budget unleashing a massive capital outlay for 2022-23, much interest has been generated in infrastructure stocks the past week. The government plans to incur capital expenditure (capex) of ₹7.5 lakh crore in 2022-23, 24 per cent more than that expected to be spent in the current fiscal. A large part of this will be spent on key infrastructure segments. The outlay for financial assistance to States for capex for 2022-23, too, has been raised manifold.
Before you jump in
While this may seem like a good time to invest in infrastructure funds, it’s worth keeping a few points in mind before you do. Such funds must invest at least 80 per cent of their net assets in infrastructure stocks. There is, however, no fixed definition of what constitutes ‘infrastructure’, and this is left to the interpretation of each fund.
As is the case with any thematic fund, an infrastructure fund too is ideally suited only for those with a high risk appetite. To minimise your risk, it’s best to cap your exposure to 5-10 per cent of your equity allocation. Also, with many infrastructure stocks having already run up, those entering now can consider smaller staggered investments rather than a one-time lumpsum. In the last one year, infrastructure funds have generated returns of 28 to 80 per cent.
Diversified ‘infra’ fund
Among the top performers in the infrastructure fund category is Franklin Build India Fund (FBI Fund). The fund focuses on India’s growth story and invests across sectors as varied as financial services, industrials, social infrastructure, transportation, and materials, not all of which may be strictly seen as infrastructure. For example, banking has been the top sector holding for many years and has accounted for 25 per cent or higher of the scheme net assets. While the FBI Fund invests in companies across market capitalisation, it has a large-cap tilt. This has likely helped it weather periods of market fall relatively better. This, along with its diversified sector exposure which includes banking, automobiles, consumer durables and even pharmaceuticals, has aided its outperformance.
Going by last 10 years’ rolling returns (rolled daily) data, the FIB Fund has generated an average 3-year return of 18.4 per cent, 5-year return of 17.8 per cent and 7-year return of 17.5 per cent. This has been significantly higher than the category average 3-year and 5-year return of 11.1 per cent and 7-year return of 10.6 per cent.
Other top funds
The next in line of top performers are L&T Infrastructure Fund and Invesco India Infrastructure Fund (see table for returns) which are more focused on what are commonly understood as ‘infrastructure’ sectors. These schemes invest in companies across market cap and do not have large, mid or small-cap bias. For the L&T Fund, cement, construction, industrial products, and industrial capital goods have been among the top holdings across time as also today. In case of the Invesco Fund, construction accounts for the largest share, followed by industrial products, cement and power.
Note that, HSBC AMC is set to acquire L&T Finance Holdings’ mutual fund business and intends to merge the latter’s operations with itself. The two entered into an agreement in December. Unlike L&T Infrastructure Fund, HSBC Infra Equity Fund is among the laggards in the category. The merger may lead to a possible dilution in the performance of the L&T Fund and investors are better off not making fresh investments in the scheme and waiting for the merger to take effect.
Rollercoaster ride
Investors must note that, given their concentrated exposure, infrastructure funds can go through extended periods of underperformance as they did in 2018 and 2019 and can even deliver negative returns over shorter periods of, say, a year or two. Having a long-term horizon and timing your entry and exit is, therefore, very important.
Over the last ten years, 1-year returns for the infrastructure fund category have been negative 40 per cent of the time and 3-year returns 14 per cent of the time, while 5-year returns have been negative only 4 per cent of the time.