Given that the Union Budget 2021-22 has proposed to spend heavily on infrastructure, will infrastructure-specific funds go up in the coming years? Would you suggest investing in them? Similarly, what's your opinion about banking-sector-specific funds?
Yes, I am hopeful that some of these infrastructure companies will benefit. We have very old infrastructure funds and they have struggled. They were very popular at a certain point before 2008. They actually drove the 2008 bull run and it started with infrastructure stocks. But I think infrastructure has been a reasonably-discovered sector and many companies are actually facing a different kind of problem in terms of their costs or the way they are structured in a competitive market. So, I don't know which of these companies will do well.
Then, there is a problem with infrastructure funds that many of them have a very loose definition of infrastructure e.g. some funds have banking as a part of the infrastructure. In fact, many funds have such liberal definitions of infrastructure that if you just drop pharma, technology and FMCG from any fund, it becomes an infrastructure fund. Everything else could be part of it. So, any fund, with the exclusion of these three sectors, virtually could be an infrastructure fund because you can justify it. In fact, when I was looking at Sensex some time back, 65 per cent of it can be said to be infrastructure. So, infrastructure is a very loose definition.
I would say that invest in a flexi-cap fund wherein the fund manager will try and tilt your portfolio depending on the growth potential of various companies and sectors and don't try to ride the infrastructure fund. The problem of infrastructure funds has been that they are out of some very promising sectors i.e. pharma, technology and FMCG which are big drivers of any fund's performance and it is good to have them. So, despite having a good outlook for infrastructure, don't give up on diversity.
With regard to the banking sector, I am very optimistic about it and it has also made a comeback. Some of the specific budget announcements are going to benefit the banking sectors substantially by creating a bad bank which will take all the bad loans and that will be a one-time big relief for many of the banks which would relieve them and start operating well. Also, a big banking reform has happened in recent times but I don't think that it has been talked about as much simply because we were too busy with the pandemic.
Firstly, there has been a consolidation of public-sector banks wherein promising banks are getting consolidated through mergers. Secondly, the government has stated that it is going to privatise two-three banks by selling its share in these banks. Thirdly, the government is also going to set up a development financial institution and will provide funding of Rs 20,000 crore to it, which will then end up holding assets of about 5 lakh crore. This has been a big problem in India wherein these commercial banks borrow short-term money like we do our deposits in current accounts, savings accounts, etc. But all corporate banks and state-owned banks are facing a problem as their investments are long term i.e. they are doing some term lending for companies, which is for a five-year term or seven-year term. So, then, you have an asset-liability mismatch. Of course, I'm not sure whether this idea will work but at least, it will take quite a good amount of pressure off from commercial banks.
All these reforms related to the banking sector and the NPA problem coming down gradually over the last few years is good news. So, I'm very optimistic about the banking sector. But should that prompt you to buy a banking fund? No. If you buy any flexi-cap fund, about 35 per cent of these funds are allocated to banking stocks. So why have them?