The Hindu Business Line : Infrastructure funds — choose from a growing basket

Investors who held infrastructure funds over the past one year would have earned an average return of about 36 per cent, beating the average returns of diversified equity funds.

While a good number of these funds were launched in the last two years, a few of them, including DSP ML T.I.G.E.R, Reliance Diversified Power Sector and Tata Infrastructure, timed their launches in 2004, coinciding well with the take-off of the infrastructure story in India.

Background: Increasing budgetary support and international funding for infrastructure projects and large capex plans converting into projects for the capital goods and engineering services companies led to a massive order book for infrastructure and engineering companies. The 2004-06 period could well be termed as a watershed for the sector, existing stocks were re-rated aggressively and new ones were added as more companies tapped the capital market.

Increase in the universe of stocks in this space, expanding market capitalisation of these stocks and the relatively long life cycle expected for the theme may have encouraged fund houses to launch infrastructure theme funds.

Suitability: Thematic funds, in general, carry higher risks than diversified equity funds, given the concentrated exposure taken to one or a few sectors and the possibility of the sector losing fancy or moving into a slowdown phase. Infrastructure funds are no exception.

Timing of the entry into such funds may also be key to maximising returns. Further, within the theme, it is important for investors to choose between a highly focussed fund (such as Reliance Diversified Power) and a more diversified fund.

Performance: While the average returns of 36 per cent over the past one year suggest that all the infrastructure funds have managed to outperform broad indices, there has been some divergence in the performance within the space.

While concentrated funds such as Reliance Diversified Power have returned close to 80 per cent over the last year, a more broad-based Birla Infrastructure managed only 24 per cent. Interestingly, quite a few funds have managed to outperform the BSE Capital Goods index over this period, after struggling to do so earlier. Exposure to sectors such as financial services and metals has given these funds a larger universe to draw from, compared to the BSE Capital Goods basket.

Relative risks: Funds that have delivered higher returns have not been the most consistent performers. For instance, Tata Infrastructure Fund, which has a higher concentration in sectors, has under performed the benchmark close to 40 per cent of the time since inception. On the other hand, DSP ML T.I.G.E.R and ICICI Pru Infrastructure have shown higher consistency with fewer periods of underperformance.

Sundaram BNP Paribas CAPEX Opportunities and DSP ML T.I.G.E.R are among the funds that offer higher diversification within the theme. In contrast, Reliance Diversified Power is a pure play on the power and allied services sectors, thus carrying higher risk.

Recommendation: Investors looking for theme funds on infrastructure with a lower risk appetite can consider exposure to DSP ML T.I.G.E.R and ICICI Pru Infrastructure as these funds have shown consistency since their inception. Sundaram BNP Paribas CAPEX Opportunities may be suitable for investors looking for higher risks while Reliance Diversified Power may be a good option for those looking at playing the power theme.

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