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Should you invest in infrastructure funds?
January 04, 2007 12:42 IST
Infrastructure funds have a mandate of investing predominantly in the infrastructure sector. In present times, as the India growth story unfolds, investors see this as a great opportunity for companies in the infrastructure sector. But are these the right funds to invest in? Or for that matter should one invest in any sector/thematic fund at all?
To find out, let us put under the scanner the performance of infrastructure funds vis-a-vis conventional diversified equity funds, over the 1-Yr period.
Diversified Equity Funds
BSE Sensex & S&P CNX Nifty
From above it is also apparent that the returns clocked by infrastructure funds are relatively higher as compared to diversified equity funds. But they are definitely not fantastically better as one may expect them to be.
The reason? Even diversified equity funds have exposure to the infrastructure sector; the exposure is in varying proportions depending on the fund management team's outlook on the sector and the mandates of the scheme they manage.
Despite the relatively better performance of infrastructure funds, investing in these funds is a high-risk proposition in our view. In other words, the risk-return trade-off for investing in an infrastructure fund may not be in your favour.
Why do we say so?
Two, while there is a lot of hype surrounding the prospects of the infrastructure sector; it is likely that the underlying risks are being over looked.
These risks include slower than anticipated growth in infrastructure spending, low profitability of new projects due to the highly competitive market and also the chance that execution may not happen as planned.
In an event when such concerns surface, stocks in the sector could take a beating till the risk-return trade-off is once again attractive to consider an investment opportunity.
Our advice to investors - regardless of how exciting a given investment proposition is, invest only if it suits your risk appetite. In our view, in most instances, the preferred high-risk instruments for you will be the regular diversified equity funds.
In such funds, the fund management team has an option to invest in a given sector (for example, invest in the infrastructure sector), but they have no compulsion to remain invested in the same. So if the outlook for a given sector were to turn bleak, they could exit and invest in some other attractive investment opportunity out there.
Finally, investment stories such as the one about infrastructure stocks/funds will come and go. What will however help you achieve your objectives will be a well-disciplined approach to financial planning. And in such planning there will be little or no need for such funds.
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