Post runup, expect more modest returns from infrastructure funds

Wide canvas

At least 80 per cent of these funds’ portfolios are invested in stocks of sectors like energy, construction, power, telecom, materials, services, and capital goods.

Since 2024, the government has invested significantly in these sectors and on building a logistics network across India. Roads, railways, renewable energy and power have seen traction. Companies in these sectors have reported earnings growth and are expected to do well in the medium term. Many capital goods companies are expected to benefit when the private sector capital expenditure picks up.

Upcycle may continue

Stability in government policies is a must for the infrastructure theme to do well.

“Factors like the government’s continued focus on infrastructure, policy stability, ability of the private sector to implement its capex plans without stretching the balance sheet, global trends like China+1, and competitive dynamics across sectors are some of the factors which will impact these funds in the future,” says Sharma.

The infrastructure sector is coming out of an 8-10-year period of underperformance, thanks to policy support from the government.

“We are still in the beginning of this upturn. Our experience suggests these upcycles last for five years or more. Hence, these funds are still a good investment bet,” says Sharma.

Dependence on govt capex

Infrastructure was a popular theme in the 2005-2007 bull market. However, it fizzled out later when government support disappeared.

Investors should be watchful regarding funding availability for infrastructure, as infra projects are capital-intensive.

“Infrastructure funds could be affected by factors like upward movement of interest rates, or lack of equity funding availability if the capital markets are in a bad state,” says Parul Maheshwari, certified financial planner.

Investors should not expect these funds to repeat their recent performance. “The P/E (price-to-earnings) re-rating has already happened. One should expect more modest returns of 15-20 per cent hereon, driven more by earnings,” says Charanjit Singh, fund manager, DSP Mutual Fund.

Infrastructure funds can be volatile.

“These thematic funds tend to be more volatile compared to diversified equity funds. They may go through long periods of underperformance if the investment cycle fundamentals deteriorate,” says Sharma.

Take limited exposure

Though the risk-reward appears favourable in the medium term, it is better to take limited exposure to these funds.

“Investors should not go for lump-sum investments in infrastructure funds at this point. The systematic investment plan (SIP) route is the best to avoid any major disappointment,” says Singh.

Maheshwari agrees.

“Investors should not have more than 10 per cent of their equity portfolio in such a theme. Those who have just started investing in equities should avoid such funds. Those who have already built their equity portfolios and are eyeing higher returns may consider them,” she says.