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Infrastructure mutual funds offered 62% in 2014 when Modi won. Will they repeat the performance?

All the 21 funds in the category were positive, and the lowest return offered by the category was 23 per cent in 2014.

, ET Online|
May 29, 2019, 11.07 AM IST
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Infrastructure mutual fund category generated a whopping 62 per cent average return in 2014, the year when Modi-led government first came to power. Franklin Build India Fund gave the highest return of 94 per cent in the same year. All the 21 funds in the category were positive, and the lowest return offered by the category was 23 per cent. Infrastructure development has been a top priority for the Narendra Modi government. It allocated around Rs 1.81 lakh crore to infrastructure sector in 2014-15. The allocation increased to Rs 4.94 lakh crore in 2017-18 and Rs 5.97 lakh crore in 2018-19. The BJP Manifesto promises to invest Rs 100 lakh crore in the infrastructure sector by 2024.

Since the Modi government has returned to power with a clear majority, can we assume that infrastructure funds may offer similar returns this year? And the years to come?

Well, mutual fund managers are not convinced.

“Last time they got a dividend in terms of collapse in oil prices which gave a lot of fiscal room for them to spend. They were putting a lot of money in roads and railways. While the private sector in the last five years remained fairly non-existent in spending money in building infrastructure. This time they might not get a lot of fiscal space to expand the infrastructure spending in a big way,” says Nilesh Shetty, Associate Fund Manager- Equity, Quantum Mutual Fund.

Fiscal 2018-19 ended with new investment proposals adding up to Rs.9.5 lakh crore, the lowest investment proposal recorded in a year since 2004-05, or in 14 years, shows CMIE data.

CMIE data shows that the growth in new fixed assets created by the private corporate sector was at its lowest in 2017-18 and there is no reason to believe that the situation could have improved during 2018-19.

Net fixed assets of the private corporate sector grew by 6.5 per cent in 2017-18 and at 7.2 per cent in 2016-17. These are the two lowest annual growth rates of net fixed assets in the private sector in the past 14 years.

Comparing the numbers, the average annual growth of plant and machinery of the private sector in the first four years of Modi government was 9.2 per cent, whereas in UPA II it was 13 per cent and in UPA I it was 19.5 per cent.

Mutual fund managers believe the same story of wonderful returns might not repeat. Apart from the lack of participation of private players in increasing the fresh capacity utilisation, they say the government will have to deal with the liquidity crisis first.

“If you are expecting the similar bounce back as in 2014 in one year, you might be disappointed. For the infrastructure financing to take place there needs to be a strong lending arrangement in the country. So, infrastructure financing has to be in place. NBFCs have seen crisis in terms of liquidity and banks also are just coming out of the NPA crisis. The long term financing needed for the infrastructure sector to grow, they will take some to put in place,” says Sunil Subramaniam, Managing Director, Sundaram AMC.

Mutual fund managers ask investors not to lose hope on the sector as they believe the performance will come but with a delay. Mutual fund managers do not advise sectoral funds to investors due to the huge risk of concentration involved in investing in one sector. They advise them to instead go for diversified funds.

“While specific sector funds provide exclusive exposure, they are subject to the vagaries of cyclicality and volatility. On the other hand, diversified schemes give a more balanced exposure. It is advisable to allocate funds based on your financial goals in diversified equity schemes with sectoral funds being a part of their overall allocation” says Sachin Relekar, Chief Investment Officer – Equity, LIC Mutual Fund.

Subramaniam asks investors to participate in infrastructure story through mid cap and small cap diversified funds rather than going straight into the sectoral , thematic infrastructure funds. He says, “These funds not only invest in infrastructure but goes a little bit wider to the supplier of infrastructure creation like capital goods supplier, cement companies, steel companies. These funds can balance it off with other sectors which could provide returns in the meantime."

Investors should also keep in mind that infrastructure funds couldn't hold on even in the the last four year of Modi government. Barring in 2017, these sector schemes offered meager or negative returns. For example, the category offered an average return of -0.97 per cent in 2015, 2.9 per cent in 2016, and -18.40 per cent in 2018. Only in 2017, they managed to offer an average double-digit returns of 47.89 per cent to investors.

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