Infrastructure Funds - Should You Invest to Ride India's Infra Boom?

India is witnessing rapid growth in infrastructure development. The infrastructure sector is seeing unprecedented activity, from roads and highways to ports and airports. The government aims to invest Rs 111 lakh crore in this sector by 2025 under the National Infrastructure Pipeline (NIP). This has opened up exciting investment opportunities to participate in India’s infrastructure boom, especially through infrastructure mutual funds.

What are Infrastructure Mutual Funds?

An infrastructure mutual fund invests predominantly in the shares of companies engaged in the infrastructure sector like construction, engineering, cement, capital goods, and urban infrastructure such as transportation, energy, and allied industries.

Some of the key sectors that these funds target include:

• Transportation – roads, railways, ports, airports
• Energy – power, oil and gas
• Urban infrastructure – water supply, sewage
• Industrial infrastructure – SEZs, warehouses
• Social infrastructure – hospitals, schools

As major infrastructure projects progress in India, associated companies can see strong growth. Infrastructure funds aim to ride this wave through equity investments.

Benefits of Investing in Infrastructure Funds

Some key benefits of parking money in infrastructure mutual funds:

• Given the policy thrust and massive planned investments, they allow investors to potentially benefit from India’s booming infrastructure growth story.
• They provide portfolio diversification beyond traditional sectors and are a way to participate in the country’s structural expansion.
• Many infrastructure investors may potentially benefit as projects take off. Share prices may see upgrades as execution risks reduce over time. Funds can benefit from identifying such opportunities early.
• These funds also enable investors to gain exposure to higher-risk infrastructure projects through professional due diligence and oversight.

However, there are certain critical aspects that investors must evaluate before parking their money in infrastructure mutual funds:

• Infrastructure stocks tend to be more volatile than broader equity markets owing to the underlying risks associated with major developmental projects with long gestation periods. Any project delays or cost overruns can adversely impact the financials and profitability of companies operating in this domain. Therefore, a moderately high-risk appetite is essential for investors seeking exposure to the infrastructure sector.
• Fund managers of infrastructure mutual funds often adopt a longer time horizon of 5-10 years while picking stocks and betting on infra stories that require patience to play out fully. Infra projects have longer completion timelines, and investors must be prepared to remain invested for similar durations rather than expect quick market-beating returns. This calls for having sufficient investment horizons from a planning perspective.
• As highlighted earlier, execution delays or cost overruns remain persistent risks in large-scale infrastructure projects and can directly hit the profitability and valuation multiples of players operating in this space. Therefore, it is critical for investors to study the project pipelines, order book status, margin protections, and overall execution capabilities of portfolio companies before deciding on investing in any infrastructure mutual fund. Robust due diligence across such parameters is vital.
• Infrastructure projects are capital-intensive in nature. The viability of such mega projects also depends to some extent on prevailing interest rates and financing costs. Higher interest rates can negatively affect project returns and payback capabilities of players. With the rising interest rate environment, funding costs may also trend up, which can compress the margins and profitability of portfolio firms. This is an important consideration as part of evaluating infrastructure mutual funds.

Conclusion

Infrastructure building offers durable long-term growth potential backed by policy support. Infrastructure funds allow participation in this opportunity through equity investments in players across the value chain. Evaluating on-ground project progress, portfolio holdings, past track record and risk appetite is crucial before investing to ride out any interim volatility. The long-term wealth creation prospects remain strong.

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