MFs build core portfolio to ride infra boom

Infrastructure is the weak link in the India growth story at the moment. Booming property prices have pushed affordable housing beyond the reach of most Indians, and high crude price is bad news for an oil importing nation like ours. But for a mutual fund investor, these are good reasons why he should be putting money into schemes that exclusively invest in these sectors.

Diversified schemes — ones that invest in a broad spectrum of sectors — account for nearly 90% of the total equity assets under management (AUM).

Traditionally, first-time investors are wary of betting on sectoral schemes, which are high-risk, high-returns plays. But that trend appears to be undergoing a gradual change. Having tasted fabulous returns after the start of the bull run in 2003, risk appetite among mutual fund investors is on the rise.

This is encouraging asset management companies to come out with sector funds, catering to the flavour of the season. IT and banking are no longer the big draws. They have been replaced with infrastructure, energy and real estate companies, which currently offer eye-popping returns.

The existing sectoral funds, investing in infrastructure and energy, have rewarded their investors with returns ranging from 43-105% over the past one year. AUM of these funds as on October 31, 2007, are more than Rs 16,000 crore. This number is expected to swell further once the money collected by the newly-launched schemes and those still in the NFO stage take off.

Compare this with the AUM of other sectoral schemes. Funds focussed on the banking sector manage around Rs 445 crore, FMCG — Rs 113 crore, technology — Rs 782 crore, pharma — Rs 286 crore and auto — Rs 67 crore. This clearly shows the heat being generated by the upbeat infrastructure and energy sectors which are bound to get hotter.

The second half of 2007 alone has seen the launch of more than 10 infrastructure/energy-based schemes which out-number the total number of similar schemes launched during the past three years. One can even find more than one such scheme from the same fund house.

UTI Asset Management, which already has UTI Infrastructure Fund, has recently launched its UTI Infrastructure Advantage Fund while Tata Asset Management, which recently launched its Tata Indo Global Infrastructure Fund, already has Tata Infrastructure Fund.

What makes asset management companies so confident about these sectors? Infrastructure, real estate and energy are the need of the hour for a speedily upcoming economy like India.

The FICCI — Ernst & Young report on the Indian real estate, 2007, has stated that the biggest push to the real estate sector in India is expected to come from huge investments expected in the infrastructure space over the next 4-5 years.

And this assertion is strongly supported by the report of the 11th Planning Commission, which has estimated the infrastructure investment, including power transmission, telecom and storage among others, to increase from 4.6% to 8% of the GDP during the 11th plan period (2007-12), an outlay of almost $320 billion in just five years.

Is there a need for caution? Stocks in these sectors have no doubt given spectacular returns to shareholders, but some analysts doubt if a repeat performance is likely. While these companies have bloated order books to boast of, the market may not be factoring in execution risks for the moment, feel analysts.