Infrastructure Funds – Definition and Should You Invest in Them?

Last Updated : June 27, 2020, 5:33 p.m.

Infrastructure is one of the largest sectors in the world and India in terms of output and employment generation. Economic growth is not possible without infrastructure development. Some of the largest economies such as the United States, Japan, China have top notch infrastructure and have been the fuel for their rise. Infrastructure funds are a kind of sector funds. To know more about sector funds, you can read another post of ours- https://www.wishfin.com/mutual-fund/sector-funds-are-these-a-good-investment/

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What are Infrastructure Funds?

As mentioned earlier, infrastructure funds are a kind of sector funds that invest in infrastructure stocks or companies engaged in infrastructure. Unlike other sectors such as banking, pharmaceuticals, technology, infrastructure is a much broader sector with many sub-sectors. These funds invest into stocks listed in these sub-sectors. Let us understand these sub-sectors.

Sub-sectors of Infrastructure Sector

Power

This sub-sector comprises companies engaged in power generation and power transmission business. Some of these companies are Tata Power, Adani Transmission, ABB India, NTPC, Power Grid, BHEL, etc.

Real Estate

This sub-sector comprises companies engaged in the real estate business. Some of these companies are DLF, Godrej properties, Shobha Developers, Oberoi Realty, IndiaBulls real estate, etc.

Construction

This sub-sector comprises companies engaged in the construction business. Some of these companies are Larsen & Toubro, ACC, India Cements, Engineers India, Shree Cement, etc.

ENERGY

This sub-sector comprises companies engaged in energy related businesses like oil & gas. Some of these companies are BPCL, IOC, Castrol, HPCL, IGL, Mahanagar Gas, etc.

Engineering

This sub-sector comprises companies engaged in engineering related businesses. Some of these companies are Bharat Electronics, Thermax, Finolex Cables, BEML, Honeywell automation, etc.

Metals

This sub-sector comprises companies engaged in metals related businesses. Some of these companies are Hindustan zinc, Hindalco, Jindal Steel, Coal India, Tata Steel, SAIL, etc.

As evident, the infrastructure sector is a very wide sector with an array of companies in various sub-sectors. But should one invest in infrastructure funds? Let us answer that.

Should You Invest in Infrastructure Funds?

Infrastructure as a sector is capital intensive and requires constant infusion of cash for growth. Also, government policies play a very important role in the infrastructure sector, more than any other sector. Government is the largest spender on infrastructure with expenditure on roads, airports, highways, buildings, power plants, ports, etc. So, government finances have to be in the pink of health for higher infrastructure spending. Also, regulatory hurdles and bureaucracy lead to slow infrastructure growth. Most of the Indian infrastructure companies have been plagued with huge debt, uncompleted projects and regulatory delays. This has a direct bearing on the performance of infrastructure funds.

If we look at the last 10 years, infrastructure funds are the worst performing category of equity funds. The average returns of all infrastructure funds are a meagre 3.88% as compared to 10-12% for the best performing sectors. These returns just match those from a savings bank account with a much higher risk. The reasons for this poor performance are the ones mentioned in the paragraph above. Also, these funds carry high risk since they are sectoral and not diversified.

We recommend avoiding investment in these funds since most of the companies in this sector are still not out of the woods. Due to covid-19, Indian economy has slowed down and government priority is to spend on the social sector. Thus, infrastructure spending will be on backburner and will have a direct impact on returns from infrastructure funds. Though there are some infrastructure companies, which have healthy financials and are growing. You can get an exposure to those by investing in multi-cap funds. To know the best multi-cap funds, you can read another post of ours- https://www.wishfin.com/mutual-fund/five-best-performing-multi-cap-funds-to-invest-in/