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Diversified Funds Score over Sectoral Funds

Even though the infrastructure sector is doing well, retail investors don't need to invest specifically in infra funds

In recent times there is a lot of talk about the pick up in the infrastructure sector. I had invested in these some years ago, and can see a positive upside. Should I book profits and exit or stay invested in these?
- Jitesh Paul

Your predicament is understandable. The recent rally in the equity markets has put the infrastructure theme as the flavour of the day and rightfully so. Over the past three months, infrastructure funds have been among the top performing category.

Strangely, the revival of infra funds' NAVs, whether it is expected to be fleeting or durable, produces strong emotions from investors. The reason: 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.

Despite our repeated suggestion to cut losses and exit these schemes, many investors stuck to them. For them, the current phase acts as a conviction that they weren't wrong in the first place, which is far more stronger in case of advisors. This makes the revival of infrastructure a much-anticipated event. 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 you 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 funds. The roads and airports argument may be true but is no reason to make such an investment.

Our reasoning stems from the fact that the very concept of a sectoral or thematic equity fund is flawed, even for a sector as broad as infrastructure. For mutual fund investors, diversification is essential. That means ignoring infra or any other sectoral story and choosing a diversified, general purpose fund 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. The lesson for you is that 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.



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