Rising equity market and government spending will boost the sector growth
Infrastructure funds are equity diversified thematic funds. Infrastructure, as a theme, covers several sectors like power, construction companies, oil and gas, cement, telecom, transportation, etc. With the upswing in the stock markets, infrastructure funds have garland good returns in the past three months. Along with the rising stock markets, the investors are also enthused by the fact that a stable government at the Centre is likely to focus aggressively on infrastructure development. The investment in physical infrastructure alone during the Eleventh Five Year Plan has been estimated to be about US$ 500 billion (at 2006-2007 prices). The Eleventh Five Year Plan envisages total investment in infrastructure (electricity; railways; roads; ports; airports; irrigation; urban and rural water supply and sanitation) to increase from around 5% of GDP in 2006-2007 to 9% of GDP by the end of the plan period if the targeted rate of growth of 9 per cent for the Eleventh Five Year Plan period (2007-2012) is to be achieved.
Along with increased spending by the government, there are expectations of high foreign inflows as well. The public-private partnerships in this sector and surplus liquidity in the market will help in infrastructure development in the economy. It will also omen well for funds with dominant infrastructure themes.
These opportunities have opened doors for launch of new infrastructure funds, while the existing funds are glowing with impressive returns.
Calendar year 2008, was flooded with NFOs of infrastructure funds as the bulls won the battle and the Sensex zoomed above 20000 in January 2008. The strong economic growth also supported. These factors attracted investors to towards infra funds.
However, the soaring inflation and resultant rise in interest rates, along with rising commodity prices severely impacted infrastructure projects. In addition to that, global financial crisis worsened the scenario and fund raising activities took a set back. Capital outflows took over capital inflows and overseas fund raising also became difficult. Domestically, the credit offtake suffered on back of high interest rates. Banks were also reluctant in providing credit on fear of rising NPAs. Overall, the companies related to infrastructure did not do well and thus infrastructure funds failed to place good returns and posted negative returns of 59.14% over 1 year period ended 31 December 2008.
Infrastructure fund diversifies investors' portfolio
A typical infrastructure fund seeks to generate long term capital appreciation by investing predominantly in equity and equity related instruments of companies engaged in infrastructure and infrastructure related sectors. As infra fund has investments in multi-sectors, it carries less concentration risk. It is beneficial to investors who prefer a long term investment in equity. The fund invests in different sectors so that the risk gets diluted or diversified. The dividends are tax free in the hands of resident Indian investors. Similarly, there is no tax on long term capital gains. There is a 15% tax on short term capital gains of the scheme.
Infrastructure funds: company wise
Our analysis on infra funds is focused on the past three months from March 09 to May 2009, when the stock market started to recover. Infra funds had exposure to nearly 240 companies as on May 2009. Infrastructure funds had highest exposure to Reliance Industries among other companies at 7.09% in May 2009 over 8.51% in March 2009. State Bank of India followed it at 4.32% with market value of 767.46 crore. Infra funds had investment in Larsen & Toubro with a market value of Rs 698.33 crore (hold 3.93%) and ICICI Bank with Rs 692.99 crore (3.90%) in May 2009.
However, this thematic funds category exited from United Spirits (7.79%), Hindustan Unilever (5.34%) and D S Kulkarni Developers (1.18%) in May from March 2009.
As per number of shares, infra funds have invested heavily in GVK Power & Infrastructure with 3.05 crore shares in May 09. They have invested in PTC India, Jaiprakash Associate, and Infrastructure Development Finance Company with shares of 2.36 crore, 2.07 crore and 1.79 crore, respectively, in May 2009.
Bullish prospect lead infra funds to rock on over 3 months
There are 26 infrastructure funds that posted 3 months returns ended 16 June 2009. The thematic fund category registered strong category average of 70.21% for the same period. 13 funds exceeded Sensex that grew 68.75% for 3 months ended 16 June 2009. Taurus Infrastructure Fund topped the category with posting strong returns of 123.97% in 3 months period ended 16 June 2009. It was followed by DBS Chola Infrastructure Fund that rose 109.20%. returns of Sundaram BNP Paribas CAPEX Opportunities Fund, SBI Infrastructure Fund - Series I and Birla Sun Life Infrastructure Fund - Plan A increased by 98.21%, 81.82% and 81.72%, respectively.
New launches: Recently, Reliance MF has launched Reliance Infrastructure Fund, which new issue is opened for subscription till 23 June 2009. Tata Infrastructure Tax Saving Fund launched in December closed on March 2009. Now, more funds are planning to come up with infrastructure funds in near future to grab the opportunity of government spending on infrastructure projects that help to rise in returns of investors' hand.
Upcoming infra funds:
In June 2009, Tata and Franklin MFs have put papers to launch infra related funds. Tata MF is seeking a nod from Sebi to launch Tata Small and Mid Cap Infrastructure Fund and Franklin MF seeking approval for Franklin Build India Fund.
The flow of investors is turning back to these funds with strong hope of more development projects that may add on their returns over a long time period. 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, within infrastructure funds; opting for less volatile funds that are well diversified across various sectors, will generate optimal returns.
