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Reliance Infrastructure Fund - Investment Analysis

IndianMoney.com Research Team | Posted On Sunday, June 21,2009, 09:45 AM

Reliance Infrastructure Fund - Investment Analysis

 

 

Reliance has come out with a new fund focused on infrastructure sector. This has invoked lots of interest among investors especially among IndianMoney.com readers! IndianMoney.com Research Team did some analysis to find out whether it is a good fund to invest and create wealth.

Investment Objective

The primary investment objective of the scheme is to generate long term capital appreciation by investing predominantly in equity and equity related instruments of companies engaged in infrastructure and infrastructure related sectors and which are incorporated or have their area of primary activity, in India and the secondary objective is to generate consistent returns by investing in debt and money market securities. 

Thus, it is looking at a multi cap strategy with a medium to long term investment horizon.

Fund Details

Minimum Application Amount

For Retail Plan: Rs 5,000/-

For Institutional Plan: Rs 5,00,00,000/-

Load Structure for Retail Plan

Entry Load

  • For subscription below Rs. 2 Crores - 2.25%
  • For subscription of Rs 2 Crores & above and below Rs 5 Crores - 1.25%
  • For subscription of Rs 5 Crores and above- Nil

(However, these entry load figures have to be verified under the new SEBI directive that has removed entry load for all new mutual funds.)

Exit Load:

For subscriptions of less than Rs 5 Crores per purchase transactions

  • 1% if redeemed/switched on or before completion of 1 year from the date of allotment
  • Nil if redeemed/switched after completion of 1 year from the date of allotment

For subscriptions of more than Rs 5 Crores - Nil

Load Structure for Institutional Plan

Entry Load: Nil

Exit Load: Nil


Comparison of Infrastructure Funds

While it may be worthwhile investing in Reliance Infrastructure NFO, it is extremely important to see how similar infrastructure funds have performed in the last few years. We have presented a comparison of leading infrastructure funds over a period of time and analyzed how they performed. 

Mutual Fund Scheme

Inception Date

Fund Corpus*

1-Month

3-Month

1-Year

3 Years

Since Inception

Tata Infrastructure Fund

20-June-2005

2213.19

29.78%

73.74%

-9.58

20.82%

26.56%

ICICI Prudential Infrastructure Fund

12-Sep-2005

3750.05

17.12

58.88

-5.02

28.21

25.48

UTI - Infrastructure Fund

01-Aug-2005

1322.11

26.13

59.00

-4.47

19.44

22.40

Canara Robeco Infrastructure

02-Dec-2005

138.68

27.60

84.75

-0.06

21.96

17.38

Birla SunLife Infrastructure Fund

17-Mar-2006

385.05

33.03

87.75

-0.30

18.09

9.31

AIG Infrastructure Fund

25-Feb-2008

226.64

31.48

71.60

-9.63

N.A.

-25.55

Sensex

 

 

23.49

76.15

-5.82

16.40

17.44

Nifty

 

 

22.35

69.07

-4.28

17.57

15.61

BSE 100

 

 

26.00

80.03

-7.12

17.37

17.45

* In Rs. Crores

 

In the above table, you may notice one thing - Funds that were launched before 2006 beat Sensex, Nifty and BSE 100 by a wide margin i.e. they did much better than overall market. However, funds launched in 2006 or later did not do well. The reason being funds launched in 2006 or later entered market very late i.e. stock prices of most of infrastructure stocks were already high. Moreover, other sectors such as IT and Real Estate sectors performed phenomenally well. AIG Fund was worst hit because it bought stocks at a record Sensex level of 21,000 and market crashed soon after. Yet Tata and ICICI were able to give almost an access of around 10% on and above Sensex. Had the market not crashed in 2008, these funds would have given even better returns as infrastructure stocks were worst hit.

 

Infrastructure Sector Performance

Let us analyze how this sector has performed over the last 3 months to find out whether it is a wise investment option at current levels. Infrastructure sector includes:

  • Airports
  • Banks, Financial Institutions & Term lending Institutions
  • Cement & Cement Products
  • Coal
  • Construction
  • Electrical & Electronic components
  • Engineering
  • Energy including Coal, Oil & Gas, Petroleum & Pipelines
  • Industrial Capital Goods & Products
  • Metals & Minerals
  • Ports
  • Power and Power equipment
  • Road & Railway initiatives
  • Telecommunication
  • Transportation
  • Urban Infrastructure including Housing & Commercial Infrastructure
  • Mining,
  • Aluminum

 

Sector Index

Current Value*

3- Months value

% Change

BSE Metals

11,038.99

5,177.77

113%

BSE Realty

  3,289.90

1,623.27

103%

BSE Power

  2,831.76

1,734.01

63%

BSE Oil & Gas

  9,387.19

6,355.25

48%

Capital Goods

12,259.94

5,924.97

107%

                                                                                                 * Dated June 19, 2009

 

Here, we can see that most of infrastructure sector has gained by over 100% in the last 3 months primarily due to good election results and positive news about government’s commitment and priority for infrastructure sectors. Does it mean these stocks are overpriced? Not really. Though these values look very high, they are actually low compared to their all time high figures in 2007. Infrastructure stocks were heavily beaten down due to global financial crisis as credit crunch hit the market. Even higher interest rates caused havoc for these Indian companies. Now, we are in a negative inflation environment with interest rates coming down and may soon see a normal level of 7-8% borrowing rate.

Current Infrastructure Situation

Though India is 12th largest and 2nd fastest growing economy in the world, its infrastructure is horribly bad. We have one of the lowest consumption of steel and roads per million people even in developing economies. A simple comparison of Indian infrastructure facilities with those of China and USA has been given in the table below:

 

 

Comparison of Infrastructure Facilities

Particulars

India

China

USA

Electric Consumption per capita (KwH)

618

1,684

14,240

Roads per million people (Km)

2,983

1,471

21,443

Steel consumption per capita (Kg)

34

244

357

Rail route per million people (Km)

56

57

755

Cargo handled at ports per capita (Kg)

572

4,265

7,953

No. of passengers handled at airports per 1000 persons

71

151

4,780

 

Thus, you can see the horrible state of our infrastructure facilities. To give you an example - infrastructure condition of India today is the same as it was in China in 1989. We have nearly 5,000 Km of expressways in India, which China had in 1989!! China has nearly 53,000 Kms of expressways – 10 times more than ours. Similarly, we produce 143,000 MW of electricity every year while China produces 720,000 MW of electricity i.e. 5 times of India. Thus, we can see a glaring gap of infrastructure development in India. Good news is that both central and state governments recognize this and are working towards it. This abode well for the future of companies involved in infrastructure development.

New Fund Offer (NFO) vs. Existing Fun

Many of our readers ask whether investing in NFO is better than that in existing fund. I believe that it is true to some extent as:

  1. New Fund can invest in the market with a different perspective
  2. NFO may have a different fund manager that might choose different stocks or may have different asset allocation for those stocks in their portfolio
  3. NFO can invest in better performing companies at the right time immediately while an existing fund will have to undergo the process of restructuring the portfolio to invest in same stocks and that will involve transaction costs.

See Also: Mutual Funds Should You Invest In NFO?

Having said that investors should understand whether it is NFO or an existing fund, if they decide to invest in a stock, they will invest at the current market price. Hence, none of them have any advantage in this respective. Still, investing in NFO has certain advantages as highlighted above.

Recommendation for Reliance Infrastructure Fund

Our research and analysis says that Sensex would touch the level of 20,000 by early 2011. The biggest gainers in this climb would be Infrastructure, Agriculture and Healthcare sectors. Even though Sensex and infrastructure stocks look over-priced at this stage, they have a good future and upward potential. India’s infrastructure facilities are in dire straits and need immediate attention to sustain 8-9% GDP growth in the coming years. Fortunately, the incumbent government has shown urgency and importance to this sector and may announce few landmark reforms in coming months.

Our analysis says investors have to take medium to long term view (over 2 years) on this fund. They can look forward to a CAGR (Compounded Annual Growth Rate) of 32% for this fund.

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