Join the bandwagon?

With the arrival of a stable government at the Centre,both institutional and retail investors have acquired the confidence to re-enter the markets....

With the arrival of a stable government at the Centre,both institutional and retail investors have acquired the confidence to re-enter the markets. This has led to a substantial improvement in the mood and driven the Sensex up to the 14,000 level. The pronouncements of the new government have made it clear that infrastructure will a key thrust area during its tenure. Taking advantage of these circumstances,Reliance Mutual Fund,the fund house with the largest assets under management in the country,has launched an open-ended equity scheme Reliance Infrastructure Fund.

The fund

Reliance Infrastructure Fund is a theme-based open-ended equity fund. It will invest 65-100 per of its assets in equity and equity-related instruments of companies engaged in infrastructure and infrastructure-related sectors,. These companies must be either incorporated in India or be India-focused in their activities. Around 0-35 per cent will be invested in debt and money-market securities.

Portfolio construction. A mix of large- and mid-cap stocks will make up the portfolio comprising 50 to 80 stocks. Both value and growth oriented stocks will be chosen.

Investment strategy. Infrastructure is a broad-based theme that gives the fund manager the leeway to invest in a range of sectors: airports,banks,cement,coal,construction,engineering,metals and minerals,ports,power and power equipment,roads and railways,telecommunication,transportation,mining,and so on.

Benchmark. BSE 100 has been chosen as the benchmark for this fund.

Fund manager. The fund manager is Sunil Singhania. Commenting on the timing of the issue,he says: With the sharp upside moves within the market in the last two months,valuations have doubled but are significantly lower than in 2008,in some cases by nearly 60-70 per cent. The concerns related to political uncertainty are also over,and companies are now able to raise money through debt and equity. Moreover,with interest rates plunging,he says,the returns from debt have come down and investors are once again looking towards equities for better returns.

Why an infrastructure fund

At present,most segments of the economy face capacity-related constraints. Infrastructure spending has already increased and is expected to accelerate further in the coming years. During the four consecutive year of 8 per cent plus GDP growth,an increase in gross capital formation GCF was one of the key factors that sustained high economic growth. Over the next five years,investment is expected to flow into ports,airports,railways,water supply and sanitation.

Risks involved

Story continues below this ad

A certain amount of risk exists with regard to deployment of the money raised by the NFO. In such funds,the fund house tends to get a lot of money at one time but portfolio construction takes place only gradually,so deployment of the money becomes difficult. The money tends to be sub-optimally utilised at least until portfolio construction is complete, says Dhirendra Kumar,chief executive of Valueresearch.

Alternatives available

A dozen or so infrastructure funds already exist in the market see table for names of these funds and their returns. Some of these funds from Tata,Canara ,and ICICI Pru have done reasonably well over a three-year horizon. Though they took a beating during the market downturn,they have done reasonably well in the past, says Kumar.

What should you do

Investing in any NFO is fraught with risk: a new scheme has yet to prove its mettle in varying market conditions while an existing scheme already has a track record. Says Kumar: The NFO is avoidable as buying the portfolio of an existing scheme is always a better option than investing in a new fund that has yet to construct its portfolio. Moreover,he adds that if you have already invested in a couple of diversified equity schemes,you may avoid investing in an infrastructure fund altogether since these schemes would provide you with adequate exposure to infrastructure-related stocks.

According to Veer Sardesai,a Pune-based financial planner,the country does require a lot of infrastructure development. From that standpoint,the funds theme has been chosen well. However,he says,a lot of infrastructure projects need government sanctions which may or may not be forthcoming. He also points out the risk of investing in such a fund. A single theme is a riskier proposition than investing in a diversified equity scheme. For the average investor wealth building through equities takes place over a long horizon of as many as 10-15 years. A single theme is unlikely to do well over that long a period. For long-term wealth creation,invest in an equity diversified fund or an index fund. He further cautions that not more than 20 per cent of your portfolio should be invested in such schemes,and you should invest with a horizon of at least three to five years.

Story continues below this ad

If you have a good understanding of the infrastructure sector and are keen to participate in its growth,then by all means invest in an infrastructure fund. As mentioned earlier,investing in an NFO as opposed to investing in an existing fund does amount to a leap in the dark. However,if your goal is long-term wealth creation,stick to a diversified equity fund with a good track record or an index fund. u

niti.kiranexpressindia.com