Will the rally in infra funds sustain?

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Infrastructure funds have rewarded investors handsomely over the past one year with an average return of 32.19 per cent. Much of this return has come in the current calendar year. The average year-to-date return of these funds stands at 20.50 per cent. If you look at the calendar-year wise returns of these funds over the past six years, however, they have been highly volatile. Returns have been positive one year and negative in the very next. Many experts, however, believe that this sector, which has been an underperformer for the past decade, is now on the cusp of a sustainable turnaround.

One fund manager who believes that this sector will outperform all other themes over the next couple of years is S Naren, executive director and chief investment officer, ICICI Prudential Mutual Fund. According to him, the infrastructure cycle began to improve from last year and is likely to get better over the next few, with every sub-segment within this space likely to do well. "Of the total number of infrastructure companies that operated in 2007, only one-third have survived and the outlook for all these companies appears to be good," he says.

The government's strong intent to revive this sector also provides reason for optimism. This year's budget had an outlay of Rs 3.96 lakh crore for infrastructure. Schemes like Ujwal Discom Assurance Yojana (UDAY), Housing for All, Smart City Network, etc have been introduced. "Besides implementing new schemes, the government is attempting to ease various policy and environment-related hurdles. It has also embarked on a strategy to augment road and rail networks and ensure availability of power across the country, with special thrust on renewable energy. Hence, we expect higher order books and turnover for many infrastructure companies," says Pranav Gokhale, fund manager, Invesco Mutual Fund.

The run-up in banking stocks, to which several infrastructure funds have considerable exposure, has also contributed to their recent outperformance. "There is a lot of bullishness about GDP growth, with GST coming in. The government is also displaying seriousness about tackling the NPA issue. A large part of those NPAs have come from the infrastructure sector and tackling this problem will be positive for both the sectors. Hence, banking stocks have run up and that has contributed to the returns of infrastructure funds as well," points out Nikhil Banerjee, co-founder, Mintwalk, a Sebi-registered investment advisor.

When choosing a fund from this category, Naren advises that you should look at the pedigree of the fund house, its risk management practices, long-term track record of the scheme, and of the fund house as a whole. Banerjee suggests investing in larger-sized funds that have been consistent performers. "If a fund manager has shown consistency with a larger portfolio in a sector that has not been investors' favourite, it is a pointer to his maturity," he says.

The sector may continue to witness volatility in the near term, which is why investors should invest only if they have an investment horizon of five years or more. Since these are sector funds, your exposure to them should not exceed 10-15 per cent of your equity portfolio. Also, look closely at the fund's portfolio. In his portfolio, Gokhale has stayed away from stocks with stretched balance sheets. You too should avoid funds that hold such stocks. Invest via the SIP route to benefit from the volatility in these funds. Given their cyclical nature, Naren advises booking profits regularly in them.

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