Infrastructure Funds Among Worst Hit In Monday’s Equity Rout

Infrastructure-focused thematic funds, an investor favourite and one of the top performers over the past year and a half, were the worst hit after the release of weak US economic data and the unwinding of the Yen carry trade hit Indian shores at the start of the week.

The broad-based selling on Monday saw the benchmark Nifty 50 lose 2.7% and the broader market gauges—the NSE Midcap 150 and the Small Cap 250—lose 3.5% and 4.2% respectively, with most listed stocks losing ground. Infrastructure thematic funds were the worst performers among sectoral and thematic funds, which became the second largest actively-managed equity mutual fund category earlier this year.

These schemes lost over 3.5% on average, with the worst performer, Quant Infrastructure Fund, losing 4.4%. UTI Infrastructure Fund lost the least ground, seeing its net asset value dropping 3.1% from Friday’s close. The Nifty Infrastructure Index, the benchmark for most of these schemes, dropped 3.3% on Monday.

Some part of the weakness in infrastructure stocks at the start of the week has been attributed to the unwinding of the Yen carry trade. A carry trade is a strategy that involves borrowing funds from markets where interest rates are low and currency is weak, to then invest in assets in other markets where the rate of return is higher. Japan, whose monetary policy adopted a negative-interest rate, had seen its currency devalued considerably as other central banks raised interest rates to combat inflation.

Some part of this has unwound quickly after the Japanese central bank raised policy interest rates last week, ending the negative-interest rate policy that had lasted for over a decade.

Infrastructure companies in India have been among the key beneficiaries of the carry trade, which allowed access to cheap capital for projects that have a long gestation period. 

Despite Monday’s decline, several of these infrastructure thematic funds have given investors outsize returns in 2024. For example, the Quant Infrastructure Fund, the worst performer on Monday, has returned over 41% so far in 2024. The five-year annualised return of this scheme was 40.8%, according to Morningstar. 

Similarly, among the five worst performers on Monday, two—Invesco India Infrastructure Fund and Kotak Infrastructure and Economic Reform Fund— have returned more than 41% in 2024. Meanwhile, HSBC Infrastructure Fund has gained 37.6% and the Taurus Infrastructure Fund has gained 28.8%. In this time, the Nifty Infrastructure Index has gained just under 26%.

Volatility is normal in market cycles, but since this dip is triggered by global reasons, investors' next move is critical.

"The category has seen a good run-up with 65% returns in last one year. The schemes have had multi-year CAGR within a year and it would be a good time to consider rebalancing," said Amol Joshi, founder of PlanRupee Investment Services.

While the retail investor can exit, It's best to stay invested for investors who believe in the story.

"These dips borne out of global reasons need to be bought. Infrastructure is a story in the making because of the allocation the government has given for solid projects," said Mohit Gang, co-founder and chief executive officer of Moneyfront.

Investors who believe in the sector need to be prepared for multiple corrections over the years as they stay invested, Gang said. He gave a five to seven year horizon for the sector to take off and does not think this dip calls for exiting the funds altogether.