Infrastructure fundsIf there has been one theme that has pushed investors into losses, it is infrastructure. Most of the infrastructure thematic mutual funds were launched, with gusto and amid fanfare, in the boom period between 2004 and 2007. Then, slowly the infra story failed to pick up. After the massive cuts i.e. up to 65% losses in 2008, infra funds did well in 2009.

Year 2014 was a notable exception when infra funds topped charts, but downside in years like 2011, 2013, 2015 and 2018 ensured bumper gains were trimmed like a crew-cut. This year, infra funds have shown some promise, albeit short-lived so far. Comprising high-beta stocks that move faster than the market, infra funds have logged an average 13% return as a category in just the one month period ended March 13, 2019. That’s more than any other equity fund category in the same period. RupeeIQ does a deep dive into the world of infra funds.

One-month stand

Last few days have been great for infra fund investors. For instance, HSBC Infrastructure Fund has gained nearly 19% in last one month period. HDFC Infrastructure Fund has seen its NAV boost up by 16.85%. IDFC Infrastructure Fund logged nearly 15% in the same time. In fact, the poorest return in this period is 9.5% by LIC MF Infrastructure Fund. The 21 infra funds have given an average 13% return, with the best scheme gained about 19% while the poorest performer did 9.5%.

Look at the table below to understand the returns picture of top 5 infra funds across different periods.

Fund 1-Month Return % 3-Month Return % 1-Year Return % 3-Year Return % 5-Year Return 10-Year Return
HSBC Infrastructure Equity Fund 18.92 5.04 -25.41 5.74 12.11 8.59
HDFC Infrastructure Fund 16.85 9.84 -13.02 8.53 11.72 13.61
Reliance Power & Infra Fund 15.06 4.06 -14.86 14.17 14.49 10.15
IDFC Infrastructure Fund 14.77 5.56 -17.41 14.62 14.02
Aditya Birla Sun Life Infrastructure Fund 14.74 5.45 -11.85 12.31 14.79 15.86

As you may have noticed, the 1-year period returns are still negative and often in double-digits. If it was not for the gains in the last 1-2 months, the losses would have been bigger. Thematic funds like infrastructure schemes are highly risky.

Retail investors should stay away from them because large allocations to such funds can dramatically change the health of your portfolio as we have seen numerous times over the years. So, don’t get any exciting ideas. Tread with extreme caution if you are thinking of buying the best-performing infra funds. We suggest you wait for some more time. Also, ask yourself or your advisor why you need a thematic fund in your portfolio.

Small(cap) wonder

You may be thinking about what has happened to infra funds. Is India building new bridges, laying new roads, creating more infra? No. We are in election territory. At this moment, we have announcements and promises only. After government formation post the May 23 election, firm plans may be drawn up that could boost infra stocks. So, what is fuelling the gains now? One factor is the rally in mid-cap and small-cap stocks.

Thanks to pre-election euphoria, the entire stock market has suddenly woken up to the fact that small-cap stocks (and mid-cap stocks) are cheap. Investments by a few foreign investors and the overall bullishness about small-caps are helping infra funds in a big way.

The reason is many infra funds have a heavy allocation to mid-cap and small-cap stocks. For instance, let’s take a look at the biggest infra funds. The nearly Rs 1,800-crore L&T Infrastructure Fund has 62% exposure to small and mid-cap stocks. The Rs 1,338-crore Reliance Power & Infra Fund has 73% exposure to mid-cap and small-cap stocks. Exceptions can be UTI Infrastructure Fund and ICICI Prudential Infrastructure Fund that have 40-45% exposure to small and mid-cap stocks.

Finance connection

Some infra funds are known to buy financial stocks. They reason that infrastructure opportunity can be captured by investing in a variety of companies. Infrastructure is incomplete without money. Who lends money to infra projects? Banks. So, some infra funds have high allocations to banking/financial stocks. The allocation to the financial sector has worked well in favour of infra funds. This is also driving gains in many infra funds with a high amount of large-cap allocations.

Some of the foreign brokerages have come out with bullish reports on infrastructure in the last few weeks. CLSA’s sector outlook dated February 19 said: “Our thesis of a turn in India’s capex cycle was validated by 3Q backlog growth of +12% YoY (second highest in 22 quarters) despite execution growth accelerating to 21% YoY (also second highest since 2012). State Govt capex joining Central capex and pre-election push were the drivers.”

Domestic brokerage Emkay recently met business heads at industrial companies a few days ago. “Infrastructure ordering should continue to drive order inflows, albeit with temporary disruption due to the upcoming general election. Railways looks to be a lucrative opportunity for construction firms as future orders should see an increasing EPC (Engineering Procurement Construction) proportion vs. BOQ (Bill of Quantities) orders until now,” they said. Emkay also said that according to industry experts such as Feedback Infrastructure, solid foundation on infrastructure reforms have been laid. Roads, railways and urban infra ordering should gain pace after the 2019 Lok Sabha election. This means a lot of activity in infra-related stocks is based on expectations.

RupeeIQ take – We reiterate that thematic stock funds are generally unsuitable for retail investors. Themes work in cycles. Unless you catch a theme when a cycle is starting, you may be stuck with duds for quite some time. Infra funds are doing well. You may even argue that why we are bearish on infra funds. Our belief is simple: don’t buy thematic stock funds based on short-term performance. If you want to chase momentum, mutual funds is not the place for such trading activities. Buy thematic funds by clearly understanding the risks involved.

Disclaimer – Please note that investors are requested to consult their financial, tax and other advisors before taking any investment decision.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. He can be contacted on