Is it the right time to invest in infra funds? News18 asks the experts
Rs 7.5 lakh crore – This is the amount set aside in the budget this year to boost India’s infrastructure. In order to become a $5 trillion economy and a developed nation by 2047, as Prime Minister Narendra Modi recently demanded, the country needs strong and seamless infrastructure. After all, the new age India will ultimately be rooted in good roads, construction, clean energy and electricity, among others.
Even India’s 2021-22 Economic Survey agrees. “Infrastructure is the backbone of any economy. The extent and quality of infrastructure determines a country’s ability to use its comparative advantage and enable cost competitiveness. It can be a vector of social and economic transformation”.
Recently, Minister Nitin Gadkari has also proposed to open the doors of investment in infrastructure projects to retail investors, just like mutual funds, through Infrastructure Investment Trusts (InvITS). Structurally similar to mutual funds, InvITS essentially pools investors’ money to place assets that will generate stable, long-term cash.
According to Gadkari, these investments, which will have an investment ceiling of Rs 10 lakh per person, provide 7-8% per annum. InvITS generally invests money in road or electricity projects.
But if you are looking to invest in India’s growth story and participate in its infrastructural development right now, you don’t have to wait for this. Infra-based mutual funds can add much-needed long-term value-creating capabilities to your portfolio.
Infrastructure funds invest at least 80% of their assets in stocks of companies active in construction, energy, capital goods, communications, metals and mining, etc. However, the period of gestation, ie development, of projects in these sectors extends over many years. This is also why these funds can experience long periods of poor performance. Infra funds are only ideal for seasoned long-term investors who believe in eventual wealth creation.
Explains Nema Chaya Buch, director of Wishing Tree Financial Advisor: “Infrastructure projects generally employ high capital and are heavily indebted. In addition, the execution time of these projects is very long, which delays the returns to the shareholders of such companies. This is because the first priority is to pay off the debt. Therefore, these funds do not give a high return in the short term”.
However, investing in infrastructure has also generated reasonably high returns over time. The Nifty Infra Index generated annual returns of 9.82%. These increased more than 5 times over the 5-year period, standing at 53.15%. Even the S&P BSE Infra fund has returned 23.40% over three years. Over the 10-year period as well, returns here hit double digits (13.60%).
However, the risks involved are very high. Shifali Satsangee, the founder of Funds Veda, an Agra-based personal finance consultancy, says, “Infra funds are seriously influenced by ever-changing laws and government controls. Therefore, investors must have a longer investment time horizon and an ability to take aggressive risk. It is advisable to only expose 5 to 10% of their total investable corpus in such thematic funds, depending on their risk profile. Moreover, it would also be advantageous for investors not to be swayed by recent returns and developments when making decisions about these funds.
Financial planner Sajeev Dawar thinks that 20% of your portfolio, or the satellite part of it, can include such funds.
“For an economy like India with promising growth opportunities, one can count on the commitment of the government for substantial investments in strengthening infrastructure, be it social infrastructure like education, health care, housing, or physical infrastructure like roads, dams, bridges, irrigation projects, digitalization, or renewable energy.”
“Keep in mind that the window of opportunity for such funds is limited. Therefore, the timing of the release is equally important. A recent example during the enforced Covid -19 lockdown focused on the healthcare sector. Many investments have therefore been made in the manufacture of vaccines, diagnostics, disinfectants, etc. However, as the situation improved, the focus shifted to building long-term infrastructure to better prepare us for such eventualities,” he concludes.
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