The tailwinds for infrastructure funds continue to be favourable in FY25, with GDP growth estimates lingering above 7 per cent and budgeted capex for infrastructure building reaffirmed at historically high levels for the year. The sector has outperformed the broader market in the last five years, with Nifty Infrastructure delivering 210 per cent returns, compared to the Nifty-50’s 130 per cent returns.
Investors should allocate a portion to the infrastructure space considering the long runway of growth. There are several funds to choose from, each with seasoned operations and nearly every fund beating the index by a wide margin. We analyse the top funds in the sector and the factors for outperformance.
Infrastructure segment
Nifty Infrastructure is one of the benchmarks for the segment, and includes companies from diverse sectors including Telecom, Power, Port, Air, Roads, Railways, shipping and other Utilities. This is a wide array of sectors under the infrastructure theme. The current index is comprised of 31 per cent invested in Oil and Gas, and around 13 per cent each from Construction, Power and Telecom. Even Healthcare and Autos are part of the fund composition.
The wide definition of sectors allows for funds to have a diverse portfolio composition to gain from varying industry cycles in power, construction, roads and telecom. This is reflected in the wide outperformance of the sector funds, compared to the benchmark. For instance, Franklin Build India Fund has only a 5 per cent exposure to oil and 14 per cent to construction and also includes a 10 per cent exposure to banks. While sector or thematic funds possess risk of concentration, the broad theme of infrastructure allows these funds to reduce that risk significantly.
The overall prospects of the sector are underlined by the above 7 per cent GDP growth estimates and high budgeted capex,. which is widely expected to be followed by the private capex cycle, too. The capex allocation moved from 3.3 lakh crore in FY19, to the current 11 lakh crore at 27 per cent CAGR. Within the expenditure head, allocation to roads, rail, power and defence saw allocations growing at 15-25 per cent CAGR in the previous five-year term. This is a direct boost to the sector and a second order driver to other allied sectors such as capital goods, automobiles and banking. The increasing expectation of a rate cut in the US, followed with cuts in India, may spur the private industry to the capex cycle in FY25 as well.
Sector funds
There are 18 funds in the infrastructure sector and the average age of the funds is close to 17 years. Measured on the basis of average daily 5-year rolling returns, the top five funds are Franklin Build India, Invesco India Infra, Kotak Infra & Eco Reform, HSBC Infrastructure and Canara Rob Infrastructure. Owing to the large field of investible universe, all the funds have bettered the index in all the three time frames (1-3-5), which implies the role of active management in this sector compared to passive management, which might be relevant for other sector funds.
Franklin Build India Fund returned an average 17.6 per cent CAGR over all the five-year periods in the last 10 years, compared to Nifty Infrastructure TRI of 7.3 per cent CAGR in the same period. The fund has also beaten the index on 97 per cent of the days in the period. The same performance is seen in shorter cycles of 3-years (18.5 per cent average) and 1-year (21.5 per cent) as well, and is the better performer in the segment.
The fund’s largest holding is in Larsen & Toubro (9.5 per cent) and has been so since October 2021. The other large holdings are NTPC, ONGC, ICICI Bank, and Reliance Industries. The fund is well diversified with the top five holdings accounting for 30 per cent of the fund, which was invested in 44 companies as of July 2024.
