Almost on cue, just as there appears to be even a mildly sustainable rally in the equities markets, infrastructure funds have become the flavour of the day. Over the last three months, the top performing category is infrastructure funds. The revival of infra funds' NAVs, whether it is expected to be fleeting or durable, always produces strong emotions from investors. That's because just before the 2008 global financial crisis, back in the heyday of the India story, investors sank in huge amounts in infrastructure focussed funds. What made this doubly painful was that during 2008, these investments sank the most and then recovered the least.
Investors--and their advisors--always like to be able to pretend that they weren't wrong, just too early or too late. This makes the revival of infrastructure a much-anticipated event. This time, there are a couple of other factors helping along the hype. Obviously, one factor is that this is the so-called 'Narendra Modi rally', or rather, the 'achhe din aane wale hai' rally. As such, there is anticipation that at some point the investment climate in the country is going to start improving.
The second factor is that the financials of many infrastructure firms are already improving because they have been selling assets and retiring debt. It is a different matter that many of them are selling the better assets because only those are sellable, but for the time being, the improvement in the balance sheets is palpable.
However, even if both these premises turn out to be true, it still does not mean that mutual fund investors have any reason to be excited by the prospect of investing specifically in infrastructure funds. For retail investors, the infrastructure argument has always started from the basics. India needs a lot more roads, airports, electricity, railways etc. Therefore, invest in infrastructure in funds. The roads and airports arguments may be true but is no reason to make such investments.
And the reason for that is not there is inherently wrong with the sector itself (there might be, but that's not my argument here). The reason is that the very concept of a sectoral or thematic equity fund is flawed, even for a sector as broad as infrastructure. Those trying to sell investment products always find that investors respond well to stories about specific sectors or themes. We've seen this happen with technology, infrastructure and with commodities among others. In infrastructure's case, the roads, airports and electricity story is particularly amenable to this.
However, almost by definition, a story that sounds convincing and in fashion at one point will go out of fashion at some other point. In fact, it is almost axiomatic that when a story is current its negative points get ignored and wished away. Both these have happened to infrastructure funds. It's entirely possible--likely, in fact--that the roads and airports will all get built but their builders and operators themselves and their equity investors will never make much money, at least not in any reasonable time frame.
None of this should matter to equity fund investors if they actually invested in funds the way it should be done. That means ignoring infra or any other sectoral story and just choosing a diversified, general purpose funds with a good track record. Such funds are supersets of all the stories that there are. There could be times when energy or infrastructure or technology stocks make somewhat more sense than others. However, that doesn't mean that you, the investor, has to identify those times and then identify the right energy or infrastructure or technology fund to invest in. All it means is that if most (or all) of your funds are invested in a general-purpose fund with a good track-record, then the fund manager will appropriately emphasise energy or infrastructure or technology stocks when it's the right time to do so. However, unlike a specialised fund, he won't go overboard with that theme and will stay within an overall framework of diversification.
That's the real lesson to be drawn from the supposed revival of infrastructure, or any other kind of fund. Regardless of the events in the markets in general, or in some specific sector, it makes no sense for fund investors to try and predict what will happen next. Diversified funds are the better choice.