Large Budget allocation to infrastructure makes theme attractive

While infra funds can offer good returns over long term, returns tend to swing wildly from one year to next

The ‘Build India’ story is back on investors’ radar screens after Budget 2023. Finance Minister Nirmala Sitharaman has proposed a capital expenditure of Rs 10 lakh crore in for the 2023-24 financial year (FY24), a three-fold jump over the FY20 allocation.

Investments in railways, airports, and roads have received a big boost. The enhanced focus on green energy and urban infrastructure will also benefit several infrastructure players. Many retail investors are keen to participate in the theme via the mutual fund route. They should do so only after factoring in the risks.

“High allocations to infrastructure in the Budget could drive stocks in the sector and have a positive impact on infrastructure-focused funds,” says S Sridharan, founder & principal officer, Wealth Ladder Direct.

Massive opportunity

Experts believe the government’s focus on infrastructure can create wealth for investors in the long run. “The opportunities are huge. While roadways, railways, airports, and urbanisation form the core, green energy and other new avenues also have immense potential. Investments in infrastructure lead to capacity generation and public asset creation. They can also lead to huge wealth formation,” says Nitin Rao, head, products & proposition, Epsilon Money Mart.

The key to the successful execution of infrastructure projects is the availability of funds. Banks’ non-performing assets (NPAs) have dropped. They are today in a position to lend to infrastructure companies.

Compared to most other themes, this is more diversified, with sub-sectors like engineering services, capital goods, construction, financiers, energy, housing, and transportation being a part of it.

Chequered past

Old timers may not be as enthused about the theme as many of them had burnt their fingers in it. It was investors’ favourite between 2005 and 2007 but fizzled out subsequently during the global financial crisis and the subsequent era of policy paralysis in India.

Things took a turn for the better with the change of regime at the Centre in 2014, as the new government made infrastructure development a cornerstone of its economic growth policy.

“The present government’s continuous infrastructure push has helped companies within the sector over the past three years,” says Rao.

The category’s best-performing fund has generated a compounded annual return of 35.6 per cent over this period. The Nifty Infrastructure Total Return Index (TRI) has also beaten the Nifty50 TRI by a considerable margin.

Myriad risks

While the infrastructure story is unfolding well, investors should be mindful of the risks.

Infrastructure funds are subject to political risk. The next Lok Sabha elections will take place in 2024. Whichever government takes office must continue to support infrastructure development.

Infrastructure projects have long gestation periods. “While the big expenditure numbers have attracted eyeballs, a lot will depend on the timely completion of projects,” says Rao.

These projects also require massive funding. If interest rates remain at elevated levels for longer than expected, funding costs could rise, making many of them unviable. There is also the risk of companies defaulting on their loans.

“The performance of these funds is closely tied to the state of the economy and can be impacted by fluctuations in the economic cycle,” says Anup Bansal, chief business officer, Scripbox. He adds that these funds are also subject to concentration risk (compared to diversified funds).

Sridharan points out that being able to time the entry and exit well becomes extremely important in a sector fund.

Investors should also be mindful of the valuations of underlying stocks.

Take limited exposure

The average investor may not be able to understand infrastructure businesses which tend to be complex.

“To invest in these funds, one needs to have a deep understanding of the infrastructure sector, including the specific areas of investment that each fund focuses on,” says Bansal. Investors who lack insight into the theme may avoid these funds. Most investors, according to Bansal, will be better off sticking to diversified equity funds, whose fund managers will anyway take exposure to this theme.

“Exposure shouldn’t exceed 10 per cent of the equity portfolio,” says Sridharan. He adds that these funds should be a tactical allocation and not form a part of the core portfolio. Only those with a high risk appetite should go for them.