Robust infrastructure is paramount for any economy, more so
for a developing economy.
It is the bedrock on which all growth takes place.
It is imperative not just for present growth but also the
sustainability of it in the future.
Infrastructure involves quality roads, railways, airports,
etc. which can help a country propel its growth further.
This helps not just in overall economic growth but also easy
movement of people.
Many emerging economies owe their economic success to the availability of strong infrastructure and therefore governments across the globe understand that it is not merely another economic policy but rather a necessity.
What are Infrastructure Funds?
Infrastructure mutual funds are those funds that invest in
companies involved in the infrastructure space, directly or indirectly.
They are thematic funds since they invest in a particular
theme, infrastructure.
These funds invest in companies involved in sectors like:
- Construction
- Finance
- Chemicals
- Energy
- Communication etc.
Should you invest in a Infrastructure Fund?
If you do, consider the following points before diving in:
Minimal Exposure
A thematic mutual fund should have limited exposure in your
mutual fund portfolio.
It should be a part of your satellite portfolio and never be
a part of your core portfolio.
Understanding the theme
Only invest if you do and can understand the theme well.
This involves being able to understand reasons behind past
performances as well as the ability to forecast future prospects.
This does not involve investing blindly on past
performances.
Long Duration
You should consider a thematic mutual fund scheme only if
you are ready to stay invested for the long haul.
This means staying invested for seven years or more.
This is important since sectors go through various phases
and cycles.
You should be able to go through all phases and cycles to
make meaningful returns.
Entering the fund
As previously mentioned, sectors go through various phases
and cycles.
If you enter a thematic or sectoral mutual fund scheme
during a peak,
Features of an Infrastructure Fund
Since infrastructure
funds are thematic, by nature they are extremely volatile. One therefore needs
to be well researched on the various sectors as well as the underlying
investment strategy of the fund. How you invest is more significant than how
much you invest. It is better to spread your investments than to jump in to the
fund in one go.
As alluring as past
returns might seem, they are never a guarantee for future success. Irrespective
of how aggressive your risk profile might be, it is better to limit your
exposure to an infrastructure fund to below 15%. This is true for all thematic and
sectoral funds and not just for infrastructure funds.
Any infrastructure
project takes time to complete, therefore by default you need a longer time
horizon. Infrastructure projects also tend to be embroiled in bureaucratic
hurdles so that’s another point to factor in. This is precisely why
infrastructure funds need a longer time horizon to stabilize.
Additional reading: Click Here to read about how Inflation is destroying your hard earned money.
When are Thematic and Sectoral Funds launched?
It is generally seen that a Fund House would launch a scheme if
it does not currently have one in a category. With SEBI not permitting a Fund
House to have more than two schemes in the same category, the timing of the
launch becomes all the more important considering that major business is
expected and driven during a NFO.
With Thematic and Sectoral Funds though, the timing of them is
very much dependent on the narrative that is propounded.
For example look at the launch dates of these IT based Mutual
Fund Schemes.
|
Scheme |
Launch Date |
|
Aditya Birla Sun Life Digital Fund |
Jan -00 |
|
Franklin India Technology Fund |
Aug -98 |
|
ICICI Prudential Technology Fund |
Mar -00 |
|
SBI Technology Opportunities Fund |
July -99 |
The
reason for all these Funds being launched between 1998 and 2000 is because this
was supposed to be the time of the IT boom in India.
The
IT sector in 1998 contributed 1.2% to India’s GDP. The TIDEL Park, the then
largest IT park in Asia was opened in the year 2000.
The
Information Technology Act was also passed in the year 2000 which paved the way
for legal procedures for electronics transactions and e-commerce.
All
of the above factors did help in creating a positive market environment for the
IT sector to boom and various AMC’s were not going to be left behind to milk
this.
This
therefore led to the launch of several IT based Mutual Fund Schemes in the
space of just 2 years.
We
have thus seen how the positive scenario around one particular sector helped in
driving investors towards a particular Mutual Fund Scheme.
When should you Enter and Exit in Thematic and Sectoral Funds?
The
reason for this is that these funds invest in cyclical businesses and ergo they
themselves are cyclical funds. Take the example of real estate, you must have
often read or heard the real sector is down or the real sector is
booming.
This
is not to say that other equity funds do not have their own volatility but with
thematic and sectoral funds, volatility is more frequent and at a higher level.
If
you enter a thematic fund at a high and exit at a low then the entire exercise
was futile. This means you cannot have a strict timeline with these funds, you cannot
pick a year when you enter and a year when you exit. You would need to be
extremely flexible and clever with your timing of entry and exit in these
funds.
Keep
in mind that the fund manager has his/her own strategy in place for entry and
exits, if your timing does not align with that of the fund manager then that is
a cause for major worry.
You
cannot predict the actions of the fund manager, that is beyond your control but
what is within your control is your actions. So the prudent thing would be to
leave timing completely up to the manager when it comes to the fund portfolio,
you would still need to take your own calls with your own portfolio.
One
of the biggest blunders that investors commit with these funds is looking at
past returns and investing blindly expecting the markets to continue with its
upward trend. When the markets slide investors exit with a heavy loss since
they entered at a market high and exit at a market low.
This
process of entering with greed and exiting with regret is very common and will
continue as long as investors look at their portfolio with goals and not
desire.
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