Infrastructure new focus area for funds

Working on the assumption that infrastructure growth will be a key driver of the Indian economy and of the equity market in the next few years, a number of funds have either launched or are in the process of unveiling funds which will invest in infrastructure-linked companies.

DSP Merrill Lynch Mutual Fund (MF) the first off the block with the launch of its TIGER Fund in mid-2004, and Tata MF has just launched its Tata Infrastructure Fund.

Saurabh Sonthalia, strategy and business development head at DSP Merrill Lynch MF, explains, "Two key pillars of gross domestic product (GDP) growth in India are infrastructure growth and economic reforms. Companies directly benefiting from these two factors have the potential to outperform in the market in the long term. The TIGER Fund was launched with this in mind."

The newly launched Tata Infrastructure Fund will invest at least 70 per cent of its net assets in companies in the infrastructure sector.

According to a fund manager, "the fund aims to marry our expertise in stock picking with a powerful investment theme."

It also believes that though the market looks overvalued from a historical point of view, but in future it is such themes as infrastructure would help investors add long-term value to their investments.

According to some market watchers and trend spotters, the next big investment story in India would be in the infrastructure sector.

Amid all the hype about India's service sector growth due to the natural advantages of intellectual and human assets, infrastructure is one investment theme that has been making its presence felt quietly but surely, says an analyst from a domestic brokerage.

Market sources said that initially it was IT services and then IT-enabled services with many assuming that biotechnology would be the next growth engine driving the Indian equity market forward in the new millennium. But contrary to expectations and predictions made by market experts, the sector has not yet lived up to its promise.

Major capital expenditure is expected ahead in infrastructure sectors such as telecom, power, roads, aviation and ports which would translate into value creation in sectors such as construction, power, oil & gas and other input industries such as cement, steel and dependent industries like automobiles, IT services etc.

A recent economic report on India from a foreign brokerage house has spelt out the necessity for an investment expenditure of $100 billion by 2010 in India, which is "currently stuck in a relatively low growth and investment cycle."

According to them, the single most important macro constraint in the Indian economy, holding back its average growth to 6-6.5 per cent is the low spending on infrastructure.

Fund managers said that if the Indian economy needs to grow even at 5 per cent plus over the next decade, it cannot do so without large investments in infrastructure.

Infrastructure funds and mutual funds, which would predominantly invest in the sector, are the way investors can ride on this business opportunity.

But some market entities point out that it is natural for players to pick on new themes in a booming market and it has to be seen how they perform in the long term.