Before you invest in infrastructure funds, read this!

With the government set to invest Rs 11 lakh crore in infrastructure for FY25, you might be tempted to invest in this sector. After all, with the BSE India Infra TRI returning 40 per cent this year (as of December 8, 2024), it's hard not to feel like you're missing out.

But before you rush to invest, let's take a closer look at what infrastructure mutual funds actually offer and whether they should belong in your portfolio.

More than just roads and bridges

There are 23 infrastructure funds available today, with four passively managed and the rest actively managed. These funds allow you to invest across a wide range of sectors fueling India's infrastructure growth.

While you might immediately think of bulldozers and highways, infrastructure funds go beyond just construction. They also invest in vital sectors like Energy, Automobile and Financials. Basically, everything that powers a growing economy.

Infrastructure funds: Performance

If you had invested Rs 100 in an average infrastructure fund in 2005, it would have grown at an annualised rate of 16.8 per cent by December 2024. The same Rs 100 in a diversified flexi-cap fund would have delivered a similar 15.8 per cent annualised return—with much less risk and steadier performance.

Furthermore, infrastructure funds tend to perform well in strong economic years, such as in 2007 when they delivered 86.7 per cent. But they also experience sharp declines during downturns, such as the -56.4 per cent seen in 2008. This pattern reflects their reliance on economic cycles, doing well during recoveries and struggling when growth slows.

In most negative years, infrastructure funds underperformed diversified funds, making them a more volatile option for investors.

Infrastructure funds: Risks

• Infrastructure funds focus on capital-intensive sectors that rely heavily on borrowing. Delays, regulatory changes and economic downturns can quickly wipe out returns.
  
• Among the infrastructure giants, only has consistently held its position as a large-cap company. Others like Punj Lloyd and Jaiprakash Associates have witnessed a sharp decline, eroding market cap and destroying shareholder wealth.
  

• The period from 2010 to 2021 saw the most dramatic fall, with 33 companies tumbling from small-cap status to penny stocks. Notable names include IL&FS Engineering and Construction Company and Reliance Industrial Infrastructure . This illustrates the sector's high-risk nature.

Should you invest in infrastructure funds?

Short answer: No.

Is there another alternative?

You can look at flexi-cap funds.

Fund houses offering both infrastructure and flexi-cap funds show a clear trend: the latter consistently leads in performance with lower risk. For example, between December 2019 and 2024, flexi-cap funds outperformed, with 10 of the 19 funds surpassing a capture ratio of 1 (a measure of how well a fund performs during the market's ups and downs), compared to just 1 out of 19 in the infrastructure category.

Unlike infrastructure funds, flexi-cap funds thrive across market cycles thanks to their diversified approach. These funds invest across different sectors, making it less reliant on the performance of a single sector.

What's more, flexi-cap funds also have ample infrastructure exposure of about 20 per cent, which means you can still cash in on the potential infrastructure growth story without having to invest in an infrastructure fund.

To sum up, infrastructure funds add cost without adding value.

Looking to make smarter investment decisions?

Navigating the complexities of mutual fund investing requires expert guidance. With Value Research Fund Advisor , you get access to in-depth research, tailored recommendations, and tools to build a well-diversified portfolio that aligns with your goals. Whether it's flexi-cap funds, or any other investment option, our insights empower you to make informed choices.

Take control of your investments today with Value Research Fund Advisor.

Also read: Should you jump on the infrastructure gravy train?