Infrastructure Mutual Funds

Infrastructure mutual funds invest in companies that play a pivotal role in shaping India’s growth story. Since these funds fall under the thematic equity mutual fund category, they concentrate on a single sector, making them ideal for investors seeking sectoral exposure. Let’s explore the best infrastructure mutual funds, understand how they work, and evaluate whether they align with your investment goals.

What are Infrastructure Sector Mutual Funds?

Infrastructure mutual funds invest primarily in stocks of companies operating in the infrastructure sector. These funds fall under the thematic category of equity mutual funds, meaning they focus on a specific sector - Infrastructure. Infrastructure companies are often viewed as key growth drivers due to their critical role in shaping a nation’s economy. 

As per SEBI (Securities and Exchange Board of India), these funds are required to invest at least 80% of their total assets in stocks of infrastructure companies. Popular examples of companies that fall under this category are Larsen & Toubro and Rail Vikas Nigam.

Infrastructure refers to facilities that support a country's growth, such as transportation, roads, power, bridges, etc. The companies within this sector benefit from high demand, given the role it has to play. By investing in an infrastructure mutual fund, you are essentially investing in companies that drive India’s infrastructure development and future growth.

Best Infrastructure Mutual Funds

List of the top-performing infrastructure sector mutual funds sorted by returns with their AUM and Expense Ratio.

How does Infrastructure sector mutual fund work?

Just like any other mutual fund, Infrastructure funds pool money from multiple investors to accumulate a corpus. They then deploy 80% of this corpus to infrastructure stocks and the remaining to other securities as preferred by the fund manager.

The funds’ NAV changes in value depending on how the underlying asset (Infrastructure stocks) in the fund performs. As an investor you earn from capital appreciation of this mutual fund. The fund manager then actively researches infrastructure-themed stock to readjust allocations periodically.

What are the benefits of investing in an Infrastructure Mutual Fund?

Infrastructure funds offer several benefits that make them unique to every investor. These benefits include:

Sectoral concentration: Investors looking to add sectoral funds to their portfolio can benefit from Infrastructure funds. Infrastructure-sector funds are a crucial sector that drives economic growth. As this sector grows the economy benefits which means investors of these funds can benefit from their expansion.

Growth-focused initiative: The infrastructure sector is constantly supported by the government as it fosters a favourable environment for the country. Investors willing to capitalize on a growth-focused initiative can explore these funds.

High-return potential: Infrastructure projects require massive investment, these projects are likely to benefit on completion from high return and have the potential to generate consistent cash flow for investors.

Should I invest In Infrastructure Mutual Funds?

Whether you should invest in an infrastructure fund or not depends on your investment goals and risk appetite. Here are the characteristics of investors likely to invest in infrastructure funds:

You can take high risks: Infrastructure mutual funds concentrate investments in one sector, making them susceptible to market fluctuations. Any downturn in the infrastructure market will also most likely negatively affect the fund's NAV.

You invest for the long-term: Infrastructure projects have a longer lifecycle which means they can take up to 5 to 7 months to yield significant returns. Only investors who are in this for a longer period will stand to benefit from sectoral infrastructure funds.

You need sectoral exposure: These funds can be the right fit if you want to benefit from concentrated investment in the infrastructure sector. If a particular sector is thriving, investors can own a collection of these companies and benefit from its growth.

Are Sectoral Infrastructure Mutual Funds high risk?

Yes, Infrastructure funds can be considered high-risk investments. This is due to the nature of business and fund structure, such as:

Concentration risk: Infrastructure sector funds are highly concentrated in this sector, which means they are more likely to be affected by any negative change in this sector. Any change in economic or government policy will affect the sector and the funds as a whole. 

Government dependence: Infrastructure projects are capital-intensive and they heavily rely on government policies and economic conditions. Delays in approvals or changes can significantly impact the sectoral performance.

Long project timelines: Infrastructure projects have a long timeline. Construction projects like roads, buildings, and bridges can take years to complete and start earning returns. The delayed process means higher risk as profitability is highly dependent on future economic conditions.

How do I choose which infrastructure fund to invest in?

If you have decided that infrastructure funds are the way to go. The next step is picking a fund, but how do you choose one when all of them have the same objective? You look at key metrics and compare them to decide on the right fit:

1. Fund Manager: All infrastructure funds follow the same approach - but what sets one apart from the other? It’s the fund manager’s expertise. Begin with looking at the fund manager’s background and expertise.

2. Expense Ratio: Every mutual fund charges an expense ratio. It is a fee levied by the fund manager for managing the fund. Check and compare the expense ratio of different funds. The lower you pay in expense ratio the more you earn as returns.

3. Key Financial Metrics: Check and analyse key metrics like Alpha, Beta, Standard Deviation, CAGR, XIRR, etc. These metrics help you form an understanding of the growth prospect of the fund. We’ve explained how to analyse and pick a mutual fund in detail here.

What will be my tax implication from gain on Infrastructure Funds?

Any gain you make from investing in mutual funds is called a ‘capital gain’ and is subject to tax. 

This tax depends on how long you have held the investment for. Investments that were sold within a year are charged a Short-term Capital Gain Tax also known as STCG.

Investments that are held for longer than a year and are then sold are charged as Long-term Capital Gain also known as LTCG. Read about the tax implications for equity funds in detail here.

Infrastructure Mutual Funds vs. Direct Infrastructure Stocks

One might get confused if they should invest in infrastructure stocks directly or invest through a mutual fund. While both options are good, in comparison mutual funds let you invest in multiple infrastructure stocks at a given time. 

Moreover, it saves you the hassle of researching and picking individual stocks. You can invest in a lump sum or SIP in both options. If you prefer professional management in infrastructure, mutual funds are the way to go. If you are confident about researching individual stocks, directly investing in them can be a better option.