If nomenclature can be likened to a villain, definition is certainly a vamp. Definition and nomenclature are all about limits, borders and confines—­a collective filter through which many things in life often fail to pass. A case in point is the standalone ‘infrastructure fund’, which is in most cases an all-purpose, broad-based vehicle that, to the imaginative mind, may look like an?extensive?buffet spread. There are all sorts of glorious?food items?but no single?major?dish to anchor it.?

Do infrastructure funds make sense? No, if you consider the sheer diverse nature of their portfolios, caught as they are in a time warp of sorts. Their inclusive style leads them to cover a wide range of sectors, from telecommunications, transportation and power to IT services, construction and engineering. In essence, the average portfolio includes most critical sectors and then some.?

Those who root for infra argue convincingly—the government’s focus on infra development being the most clinching rationale. At the heart of their oeuvre are ambitious programmes outlined by the authorities, the latest of which (like “Gati Shakti”) found specific mention in Union Budget 2022. Such projects would entail considerable public expenditure, the key driver for all infra programmes being spearheaded by the government at this juncture.?

On Closer Inspection

The argument appears alright till the point you look at portfolios a bit more closely. Not the portfolios of infra funds, but those of other diversified equity funds that do not trouble themselves with sweeping themes.?Instead,?they go by such other clinchers as market capitalisation. To use plain words, pick up any standard multi-cap fund, and?the chances are?that its portfolio will include all the vital sectoral plays—financial services,?infotech, pharma, auto, consumer durables, capital goods and so on.?

The point here is simple enough. An investor who has already allocated to various market cap-oriented funds, may?subsequently?look at sectoral funds for adding value to his?holdings. He may, therefore, consider specific finance or technology funds in keeping with his aspirations and risk appetite. Sectoral funds?by definition?would each have a narrow investment universe, the coverage of which should embellish the investor’s allocation strategy.?  

In comparison, infra, as we see it in the asset management space,?is neither here nor there. These do not restrict themselves to a single sectoral space; instead, the fund managers concerned work out a?mish-mash; in the process, even the best of them ride on the strength of what is clearly a rather loose definition.?  

The situation results in a compelling question: why have most asset management firms retained these funds in their original shape? And why should an ordinary investor consider these funds at all for investment purposes? Mind you, the funds do not have terrific track records to boast of. In fact, the average infra fund has returned about 11-12 per cent in the past five years. Remember, this is a period when the broad market has fared well—the 50-share Nifty turned in 15.16 per cent (total returns, as of January 31, 2022)—the impact of Covid-19 notwithstanding. A handful, like Invesco Infra (17 per cent, approximately), have done better, while a few others, like HSBC Infra (an unenviable 5 per cent-odd), have left a bitter taste in the mouth.?  

The 30-share Nifty Infrastructure Index, which appears to be a free-ranging benchmark, constituted inter alia by stocks picked up from various sectors, has 10.79 per cent returns since inception and 13.42 per cent five-rear returns—not a compelling?show. Still, let me?determine?an average member of the infra family, in this case the fund managed by Kotak Mutual Fund, to underscore the point. The fund’s five-year returns are 11.71 per cent versus 8.9 per cent of the S&P BSE Infra Index. Over 10 years, it is 13.76 per cent for the fund versus 10.49 per cent for the index.?  

The fund, I must admit, has beaten the chosen index convincingly. Its portfolio has stocks picked up from segments like construction, telecom, engineering, energy and chemicals. That, collectively speaking, is a rather large swathe of the full economic spectrum.?

An Alternate Route

The very tendency to spread wide will bring down the infra fund genre; it will not appeal to investors in any?significant?manner. Ergo, an alternative needs to be identified. However, none is evident on the horizon. So here are a few points for the average investor.?  

• Plain-vanilla infra funds (as we know them today) won’t make any significant difference to the ordinary individual’s portfolio. So, it may make sense to move out of them, provided one’s investment objective has been fulfilled, and there is at least a modicum of capital appreciation.?

• It may also make sense to identify one or more multi-cap funds, assuming such funds are in sync with the investor’s risk profile. While these too will be all-sector plays, the underlying principle will be diversification by way of market?capitalisation.?

• An investor may choose broad-based index funds as these will ensure diversification. A fund based on, for example, the Nifty 100 will encompass a multitude of sectors, and there will be no attempt to outdo the benchmark.?

• Specific sectoral funds may be chosen as distant value-additions, provided the investor is fully aware of the risk in such a strategy.?Despite the narrow segment it operates in, a technology fund can serve as a great kicker in phases when IT companies are doing well, leading to accelerating valuations.?A number of sector-specific vehicles are available in the market, and a?wise investor will be expected to choose well from among the lot.?

I must mention here in this context that, as always, moving out of a fund may just bring in capital gains and the levy that will most palpably follow. An investor who exits from a slow-moving vehicle should be prepared to?pay the price: exit loads, if any, and income tax, the immediate certainty. Moreover, an exit should, and I must insist on this bit, be fully in tune with his overall risk-return dynamic. Else, the very purpose will be lost.?  

Alternatively, certain other thematic possibilities may be explored, provided the same travesty is not repeated. For instance, an investor who is keen on the country’s manufacturing sector may consider one or two of the new-styled funds that have been rolled out in recent years. At this stage, no one seems to be sure of how manufacturing will eventually shape up. At any rate, it is once again quite a broad term. Ditto for somewhat abstruse monikers like economic reforms. After all, many sectors are known to have gained from the reformist policies pursued by the government.?Investors may not fully appreciate such funds; indeed, these are likely to end up in the wilderness of the capital market.

The author is Director, Wishlist Capital