What are infrastructure mutual funds?

An infrastructure mutual fund is a type of mutual fund scheme that primarily invests in stocks of companies operating in the infrastructure sector. All the companies involved in the development, construction, operation, and maintenance of infrastructure assets such as roads, highways, ports, airports, railways, power plants, telecommunications, and urban infrastructure fall under this category. Mutual funds schemes for the infrastructure sector aim to capitalise on the growth potential of the infrastructure sector in India.

• Table of contents

1. Characteristics of infrastructure mutual funds
2. Types of mutual funds in the infrastructure sector
3. 3 benefits of investing in infra mutual funds

Characteristics of infrastructure mutual funds

Sector-specific focus: Infrastructure mutual funds concentrate their investments in companies operating in the infrastructure sector. They aim to benefit from the growth opportunities arising from increased infrastructure spending, initiatives, and economic development in India.

Higher growth potential: Infra mutual funds offer a relatively higher growth potential than regular equity funds since they provide targeted exposure to infrastructure sector driven by factors such as urbanisation, industrialisation, and infrastructure development initiatives. These funds seek to capitalise on the higher demand for new infrastructure projects and the modernisation of existing infrastructure assets in India.

Higher risk and volatility: While mutual funds in the infrastructure sector may offer a relatively higher return potential, they are subject to sector-specific risks and market volatility. Factors such as regulatory changes, project delays, funding constraints, and economic cycles can affect the performance of infra mutual funds.

Longer investment horizon: Since infrastructure projects often have extended gestation periods and require substantial capital investments, infrastructure mutual funds are relatively better suited for a long-term investment horizon.

Types of mutual funds in the infrastructure sector

Some of the popular types of Infra mutual funds are:

• Thematic funds: These infrastructure mutual funds focus on specific sub-sectors or themes within the infrastructure industry such as transportation infrastructure (roads, highways, railways), energy infrastructure (power generation, transmission, renewable energy), utilities infrastructure (water supply, sanitation, sewage treatment) and so on. They are characterised by a relatively higher return potential and a higher level of risk.
• Infrastructure index funds: They track the performance of infrastructure-related indices or benchmarks. Two of the most popular infrastructure-related indices are Nifty Infrastructure Index and S&P BSE Infrastructure Index. Infrastructure index funds carry a relatively lower level of risk compared with active investment in Infrastructure thematic fund since they offer passive exposure to the infrastructure sector. However, the return potential is also lower when compared to that of thematic funds.

Benefits of investing in infrastructure mutual funds

Infrastructure mutual funds can offer several benefits to investors, especially those looking to diversify their portfolios beyond the common mutual fund options. Some of the advantages of infrastructure mutual funds are:

Higher growth potential: Since India is growing and developing at a fast pace, infrastructure mutual funds aim to capitalise on these growth opportunities by investing in companies and projects involved in building and maintaining infrastructure assets.

Government push: Infrastructure assets tend to do well when the economy is recovering as well as expanding. The recent growth in infrastructure funds is due to the present government's focus and push on infrastructure.

Inflation hedge: Infrastructure assets often exhibit inflation-hedging characteristics, as the revenues generated from infrastructure projects typically increase with inflation. By investing in infrastructure mutual funds, investors can indirectly hedge against inflation and potentially preserve the purchasing power of their investment over time.

Conclusion

To conclude, infrastructure mutual funds allow investors to capitalise on the high growth potential of the infrastructure sector in India. Investors must consider factors such as sectoral exposure, fund management expertise, and liquidity when selecting infrastructure funds that align with their unique investment goals and risk tolerance. As economies expand and infrastructure demand increases, infra-mutual funds have the potential to deliver reasonable long-term returns.

FAQs:

How risky are mutual funds in the infrastructure sector?
Infrastructure mutual funds aim to tap into the growth potential of the infrastructure sector in India. Being sector-specific, they carry a higher level of risk than regular mutual funds which are generally more diversified in nature.

How long should I hold my investment in an infrastructure fund?
Infrastructure projects tend to have longer gestation periods. Therefore, you must consider a longer investment horizon for an infrastructure fund. By adopting a buy-and-hold strategy, investors can potentially benefit from the compounding effect of long-term infrastructure investments.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.