Skip to main content

Infra Theme - With 3-5-yr horizon will find it rewarding

   Infrastructure was touted as the most happening sector in 2008. Every big fund house launched an infrastructure fund, and investors were more than happy to pour money into them. But now, three years later, it is a different story. Infrastructure funds are languishing at the bottom in terms of returns and many disappointed investors are pulling out money from these schemes. The CNX infrastructure index has slipped 21.3% in the past year compared to an 11.6% fall in the Nifty. While Reliance Infrastructure Fund has lost 39%, most other funds have lost more than 20% over the past year.

THE GROUND REALITY

The infra segment has been going through a rough patch for the past 18 months due to several reasons. Primary amongst them are issues related to land acquisition and an increase in project costs and higher working capital.

Land acquisition continues at a snail's pace, posing problems for several infrastructure projects. In the power sector, there are delays in payments by state electricity boards, especially to power generating companies. Last but not the least, costs of raw material such as coal have increased and there are issues regarding their availability. All this has severe repercussions for any infrastructure project. Project costs across power, roads are going haywire and companies need higher working capital. Infrastructure projects are extremely capital intensive. If companies need more money to manage their working capital, they will have to borrow more. This pushes up their interest costs and affects their margins. Funding is another issue for infrastructure projects. Banks generally don't fund projects with very long gestation periods. The interest rate cycle is on an uptick, adding to infrastructure companies woes. The central bank, in an attempt to control inflation, has raised interest rates 10 times since March 2010. "The cost of finance is the major problem for infrastructure projects. The cost of funds is too high and makes many infrastructure projects unviable. Finally, the infrastructure segment, to a large extent, depends on spending from the government as well as its policies. Over the past year, the government, beleaguered by many issues, has been slow in rolling out infrastructure projects. A crucial bill relating to land acquisition is still stuck. This has led to a delay in sanctioning and closure of new projects in the infrastructure space.

IS THERE A WAY OUT?

Infra funds have been underperforming the broader indices for three years. As per data available with Valuersearchonline.com, which tracks the mutual fund industry, while the universe of infrastructure funds returned 2.45% per annum, the Nifty returned 4.15% per annum. Worse, many experts believe the immediate future of these funds don't look bright. In the short term, there could be more downside," says Vishal Dhawan, founder, Plan Ahead Wealth Advisors.

However, many still swear by the theme. Their argument is simple: For the India story to roll on, infrastructure building is a must. The country can't do without a robust infrastructure if it has to grow the GDP at 8%. Be it roads, ports, water, power or metro rail systems, all of these are crucial to support growth.


Good infrastructure is a basic support system of the economy and is needed to facilitate high growth rates. Hence, it is imperative that the government resolves issues relating to infrastructure growth.


Secondly, the cost of funds, a major input for the sector, may come down soon.
The cost of finance is the major problem for infrastructure projects. We need a situation where we can finance projects easily. Many now believe that the interest rates are close to their peak levels.


As of now, there are indications that there may be at best one more rate hike before the central bank pauses. Clearly, if rate hikes slow down, companies in the sector will heave a sigh of relief.

SO WHAT SHOULD YOU DO?

Investors in these funds are disappointed. Infrastructure funds have severely underperformed for three years, with many investors losing 20%-40% of their money in the past year alone. However, many experts don't want you to exit these schemes, as they believe they can deliver in the long term. There is no point in exiting your investments at this point at a loss when the future is bright. Long-term investors should stay put. Investors should realise that though investment in infrastructure starts early, returns often come in late but at a faster rate and, hence, investors must be patient and have a 3-5-year time horizon while investing in such funds.


New investors should first figure out if sectoral funds, especially infrastructure funds, will meet your requirements. Sectoral funds carry high risks and are meant for individuals with a higher-risk appetite. Investment advisors do not recommend such funds to investors with a low-risk appetite. Unlike in a diversified equity fund, where the fund manager takes a call, in a sectoral fund, an investor should be in a position to understand or assess the fundamentals of the sector before choosing one. Invest not more than 10% of your portfolio in sectoral funds. Those with a low-risk appetite may consider large-cap diversified equity fund.

Finally, if you have decided to invest in the infrastructure theme, you need to screen the fund portfolios carefully before selecting your fund. Be sure, that it follows the infrastructure theme and is in line with your objectives before you commit your money. Do not commit money in one go, invest in phases over a six-month period, using a SIP.
 

Popular posts from this blog

ICICI Prudential Dynamic Plan Invest Online

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   ICICI Prudential Dynamic Plan             Invest Online This fund does remarkably well during falling markets, but fails to show the same prowess during a rising market. The fund sticks to its mandate to adapt to the dynamic nature of the market by shuttling between debt and equity. It takes aggressive asset calls in equity when the market surges by investing in quality mid-cap stocks. At the same time, it adopts a defensive strategy by investing in debt and cash when markets get overvalued, making it a good long-term choice.     For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call     Leave a missed Call on 94 8300 8300   Leave your comment with mail ID and we will ...

Lump Sum or SIP?

Invest Mutual Fund Online     You have a lump sum in hand and you wish to invest in equity funds. However, you have heard a lot of talk about investing in equity funds through Systematic Investment Plans (SIPs) because they help average costs, ensure you do not ill-time the market, and help you invest in small sums, besides giving you many other advantages. So, should you invest the money you have in hand in one go, or let it remain in your bank account and then do an SIP? There is no harm in investing a lump sum amount. For all you know, compounding, over the long term, could work better with lump sum. However, make sure you fulfill all of these three criteria if you want to invest in one go. Else, SIP is the way to go. #1: You invest for the long term According to past data, ideally, if you have a time frame of 12 years or more, you can consider lump sum investing (provided you satisfy the other two conditions that follow). So, what is the sanctity behind 12 years? Is it because only...

ICICI Lombard to provide weather cover in 10 states

ICICI Lombard General Insurance Company has been given the mandate to provide weather-based crop insurance for rabi season (2010-11) in Madhya Pradesh, Bihar,Tamil Nadu, Karnataka, West Bengal, Chhattisgarh, Jharkhand and Himachal Pradesh.    The insurance company will cover 69 districts — 30 loanee districts (farmers who have taken loans) and 39 non-loanee districts. The major crops that ICICI Lombard covers for the season are winter paddy, cotton, wheat, mustard, barley, maize, onion, potato, tomato, lentil, peas, arhar, jowar, fenugreek, coriander, cumin, methi, isabgol, brinjal among other crops.    Weather-based crop insurance provides cover against weather-related risks such as excess or deficit rainfall, variations in temperature and fluctuations in humidity. This scheme facilitates immediate compensation based on certified data collected from independent third party bodies such as Indian Meteorological Department ( IMD ) and National Collateral Management Services Ltd. ( NC...

Mutual Fund Review: Reliance Regular Savings Balanced

Reliance Regular Savings Balanced fund has shown great resilience during market crash After a shaky start, this fund has established itself as a strong contender in this space. In the past three years it has ridden the market well by not only delivering during the market run-ups but also displaying resilience during the crash. In 2008, it witnessed the second lowest fall among its category and last year it was amongst the top three performers with a return of 76 per cent (category average: 61%).   The poor underperformance in 2006 can well be credited to the low equity allocation of the fund, which stood at just over 10 per cent for only four months that year. Though the fund has the leeway to go up to 75 per cent in equity, it has never touched that limit. In fact, it has exceeded 70 per cent in just five months in its entire history. During the crash of 2008, the fund managers had no problem going right down to 54 per cent (equity exposure). Fund managers Omprakash Kukian and A...

Feeder funds are the cheapest way to invest in gold

Buy Gold Mutual Funds Invest Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Call 0 94 8300 8300 (India)   There are four ways to put your money in gold — buying physical gold/jewellery , putting money in gold exchange-traded funds ( ETFs ), investing in a gold savings fund and going for the National Spot Exchange's e-gold. Now, some gold ETFs and e-gold even allow taking physical delivery of gold at the end of investment tenure. That might sound good if you wish to possess physical gold. But, given the firm price of gold today (almost ~31,000 per 10g), it is important that gold is bought through acost-effective avenue. Reason: Investing comes at a price. Add to that, India's gold buying is expected to decline in 2012 and 2013, according to the latest World Gold Council ( WGC )report. WGC Director Vipin Sharma feels gold imports may drop to 800 tonnes from 967 tonnes last year. And the mix between the jeweller...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now