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.

Infrastructure funds
In the infrastructure funds segment, Tata Infrastructure (61.3 per cent) surfaces as the top performer, followed by UTI Infrastructure (60.9 per cent). PruICICI Infrastructure (59.2 per cent) and Sundaram Capex Opportunities (57.6 per cent) occupy third and fourth positions respectively.

Diversified Equity Funds
PruICICI Dynamic with a net asset value appreciation of 58.9 per cent over the 1-Yr period emerges as the best performer in the diversified equity funds segment. Reliance Regular Savings - Equity (57.5 per cent) and Franklin Opportunities (56.9 per cent) also feature among the top performers.

BSE Sensex & S&P CNX Nifty
The BSE Sensex has posted a growth of 46.2 per cent, whereas S&P CNX Nifty has risen by 39.0 per cent over the 1-Yr time frame. Hence, it is evident that the top performers from both the infrastructure funds and diversified equity funds segments have successfully out-performed the benchmark indices (the schemes may have different benchmarks but for the sake of simplicity we have compared them with the most popularly followed indices).

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?
One, when investing in thematic/sector funds, one needs to time his entry and exit into the fund very well. The reason being each sector goes through a cycle of good and not-so-good performances. Since in a thematic/sector fund, the fund manager has little choice but to remain invested in the sector, no matter what the prospects, the investor has to make the call on when to exit the sector. In our view, getting the timing is very difficult, if not impossible.

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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