Have Infrastructure Funds Found Their Second Wind?

From Samruddhi Expressway to Mumbai’s Atal-Setu Bridge, these initiatives signify the government’s dedicated focus on infrastructure development. Considering the trend, is it a good time to seize the opportunity by investing in infrastructure funds? Rakesh Deshmukh takes a closer look at the scenario 

Have you ever come across old photographs of your local area taken by your grandparents? You might have observed significant changes in the infrastructure when comparing historical images to the present. Perhaps, as you travel by any means of transportation, you notice the remarkable improvements in terms of roads, bridges, railways, and so on, with once bumpy routes now transformed into smoothly paved thoroughfares. Pause for a moment and analyse your local area, considering all the significant changes in infrastructure such as bridges, dams, roads, railways, airlines and factories. Earlier, explaining their development from five to ten years ago was really challenging. 

One recent example is the Atal-Setu Bridge in Mumbai, the longest sea bridge in India, stretching about 16.5 km. It efficiently connects the two edges of Mumbai, bypassing traffic concerns. Previously, covering the same distance took around two hours, but now it only takes 20 minutes. This infrastructure marvel stands as a testament to the government’s vision, emphasising strategic investments in infrastructure. This approach aims not only to boost the economy but also to enhance the overall convenience level 

Do you believe that this will provide a significant boost to Indian companies, especially considering the government’s infrastructure push and the ‘Make in India’ initiative? Infrastructure is the backbone of any economy, playing a crucial role in its development and growth. These developments are expected not only to enhance the country’s infrastructure but also offer advantages to companies operating in the related sector. Given the current government’s strong emphasis on prioritising Make in India and promoting domestic manufacturing, Indian companies are likely to be significant beneficiaries of the government’s infrastructure push. 

This implies that these companies can anticipate receiving substantial work orders, ultimately contributing to their growth. Shouldn’t you therefore seize the opportunity by allocating some part of your capital towards this growth curve through investing in infrastructure mutual funds? To do so, we first need to know about these funds, their performance, India’s infrastructure cycle, current trends, and more. So, let’s begin. 

What are Infrastructure Mutual Funds?
An infrastructure fund is a type of investment fund that pools capital from multiple investors to invest specifically in infrastructure-related projects, assets, or companies. These funds are designed to provide investors with exposure to the infrastructure sector, which includes critical physical and organisational structures necessary for the functioning of any economy. This sector operates cyclically, with revenues closely tied to economic expansion. 

When the economy prospers, infrastructure companies also thrive, but economic downturns can negatively impact their performance. Infrastructure funds allocate investments across various segments within the infrastructure domain, including construction, metals, oil and gas, capital goods, aerospace and defence, and more. However, each infrastructure fund has its own distinct portfolio composition. 

Infrastructure Funds Performance 


One can observe the peak in the graph, indicating that the fund has delivered impressive outperformance over the last year with a notable 58 per cent return. However, there is an expectation that these funds have not outperformed their benchmark indices across the major time periods. 

It’s crucial to note that sector funds, like infrastructure funds, tend to outperform when the respective sector is performing well. To gain a deeper understanding, it is essential to analyse the historical trend of the infrastructure sector in India, assessing its behaviour over the years, and identify the current trends. 

Infrastructure Sector Trend in India
Let’s start by observing trend of the Nifty Infra index over every three-year time period from 2004 until the present. Examining these charts provides insights into the historical behaviour of the infrastructure sector in India. 

Upon reviewing the graph, it becomes evident that the infrastructure sector experienced a boom from 2004 to 2006. However, towards the end of 2007, it reached a peak and initiated a corrective phase, as depicted in the chart. Subsequently, the sector entered a prolonged consolidation period. In early 2021, there was a breakout from this consolidation, reaching the previous all-time peak of December 2007 by July 2023. After consolidating for three to four months, the sector witnessed another rally, breaking the previous resistance level and currently stands at its all-time high. 

This pattern signifies a historical boom, followed by a consolidation phase and a renewed rally. Comparing this with the previous rally, which saw an increase of over 600 per cent in four years (2004 to 2007), the current rally has only advanced approximately 30 per cent from its breakout point. Considering the government’s focus on infrastructure development in India, it appears to be just the beginning, and there is potential for further significant returns in the sector. 

Factors to Consider
■ Long-Term Horizon — A long-term commitment is essential, spanning at least seven to ten years, to capitalise on the potential growth and stability within the infrastructure sector. 
■ Prudent Capital Allocation — Exercise caution in capital allocation, dedicating not more than 10 per cent of your overall portfolio to infrastructure funds. This approach will help manage risk and maintain a balanced investment strategy.
■ Limited Diversification— Recognise the limited diversification inherent in sectoral funds, particularly infrastructure funds. These funds remain tethered to the same sector and cannot diversify beyond its confines.
■ Volatility Tied to Sector Performance — Given the inherent volatility in sector-specific investments, brace for fluctuations in returns as they closely mirror the performance of the infrastructure sector.
■ Government Intervention Impact — Stay attuned to government interventions, policies and initiatives as they significantly impact the infrastructure sector. Being a vital player in infrastructure development, government actions can influence fund performance. 

Investing at the Right Time
Certainly, one should allocate some part of their capital towards the growing economy and infrastructure. It also requires a long-term commitment, especially considering that the Indian government has set a target to achieve developed economy status by 2047, a goal that is 24 years away from today, which, without advanced infrastructure, may be hard to achieve. Moreover, building infrastructure, such as bridges, dams, and railways, is a time-intensive process and is never constructed overnight. 

Furthermore, over the past few years, we have witnessed a more execution-focused and long-term approach from the government towards capital expenditure. Hitherto underinvested sectors such as railways, urban infrastructure and water have received significant attention, while the government has allowed the private sector to play a more prominent role in areas like ports, roads and power. Investors in these funds are required to exercise patience and maintain consistent contributions over an extended period – ideally a minimum of seven to ten years or more. Moreover, there is no right or wrong time to initiate investments; anyone can commence investing at any time based on their financial situation. 

Conclusion
Infrastructure funds stand to potentially gain the most from the anticipated upturn in the investment cycle. These funds typically allocate investments across various sectors such as power, roads, ports, cement, building materials, steel, oil and gas, engineering and capital goods, logistics, property developers, and infrastructure financiers. With a welldiversified portfolio, the growth rate of investments in India becomes a key underlying driver of fund performance. With a positive outlook on the investment cycle, we believe that infrastructure funds have a very bright medium-term to long-term outlook, making them a favourable investment option for investors.