- Wealth PMS (50L+)
I had a chat with the IDFC Mutual Fund team recently. They have an infra fund launching between 14th and 20th of this month, and I spoke to members of their fund management team.
So first – salient points – here’s the scheme document. The NFO runs from 14th to 28th of Feb. They will deploy the money starting 5 March. There’s an exit load of 1% if you get out within a year. There is no entry load.
Note: I do not get paid by IDFC for writing this. I’m not an investor in their company. I have no commercial relationship, at the moment or even visible at the time of writing this post. I don’t do paid posts, ever. (Unless you will give me Rs. 50 crores. I accept cheques and bank transfers.)
I’m going to do a Q&A format for this fund, gleaned from the answers team gave me.
Okay, so what is this fund about? What is "Infrastructure"?
They will go by the World bank and RBI definition. Road, ports, water, telecom, SEZs, power, construction, real estate, Oil and Gas. Which sounds like a lot but they told me they WILL NOT do: IT, Pharma, Banking, FMCG and Auto.
Their idea is to hit low debt companies (or low geared) with reasonable cash flows and later, consolidation targets. The sales pitch is to target it piece by piece, as valuations crumble under inflation; first the visible-cash-flow companies (utilities and the like), then the contractors (L&T types I imagine?) and later the players that will get better on consolidation. Interesting play, really.
Why another fund? Why another Infra fund? Why now?
Why another fund? While this is sectoral focus, IDFC has a crazy number of equity funds – Classic Equity, Imperial Equity, Premier Equity, Strategic Sector 50-50 Fund, India GDP Growth Fund, Small and Midcap Equity Fund and Enterprise Equity Fund. Apart from the Nifty Fund (Index) and a Taxsaver Fund (ELSS). This is too much, and par for the mutual fund course in India – there is simply too much out there doing the same thing; you could achieve pretty simple objectives by having a single large cap fund, one mid/small cap fund and the index/taxsaver outliers. Sector funds: one per sector.
Why another Infra Fund? Because (they say) other funds said infra and went and did everything including IT and Pharma. For the record, this is what I got from the conversation. I have not verified this.
Why now? Valuations are better, and attractive, they say.
Will the sector not get destroyed by rising interest rates?
They did say low-debt companies in general. But yeah, this is a high debt sector. Plus, given the government guarantees required to run this space, you need fiscal strength at the government end, and that also looks dicey.
IDFC, their parent, is an infrastructure finance company. What gives?
I didn’t really get this piece. They said there’s some sort of Chinese wall, but they do exchange notes, formally and informally. You can either have a chinese wall or not but not parts of both.
What I’m concerned about – will they take all the good portions into their parent (they have P/E funds that do equity), and saddle us retail investors with the bad part? The answer will only be visible in time.
How much % of their liquid net worth do the fund managers own (or plan to own) in the fund?
This is a question no one seems to ask. The answers I got were:
Honestly, if you’re running a fund, you should have your own money in it. But these are not hedge-funds, these are mutual funds, so one should get some leeway (plus, IDFC owns it, so the fund manager could be fired or changed anytime).
What’s the verdict?
Sector funds are horrible in upturns and great in downturns. The sector has been destroyed, for the most part.
(Click for larger pic)
But obviously there is more to come. There are other infra funds out there, which have also done badly, almost all negative returns in the 3 year time frame. With the notable exception of Canara Robeco Infrastructure, which has given a 6% annualized return in the last four years.
Why not buy the stocks directly? Oh, that might work. The sector has thrown open some incredible stories – like Elecon Engineering (P/E of 6 now, grown nearly 50%) which I’m long, to the likes of REC, PowerGrid and PFC which must be salivating to the value investor. Even RELINFRA, battered by rumours, must look like a good pick. Heck, you could just piggyback on the infra fund picks, which they release as part of their portfolio every month.
But if you don’t have time, don’t even bother. Sectoral funds have a higher volatility, but they’re always good when the sector is down. Still, we’re not yet in "tough" markets – compared to earlier, the market is not "down" enough. But then if you don’t have time, you won’t have time for timing either.
IDFC has the NFO till the 28th. The 28th is when the budget comes, which is the day you’ll know about the greatness or the suckiness of the infra space going forward, and that impacts everything.
You have to ask yourself – do you want an infra sector fund? There’s hajaar volatility, but do you believe in that sector AND that valuations are low? Do you believe that inflation won’t hurt this sector enough to make your fund value so low you’ll want to sell? If the answer to any of these questions is "What the F are you talking about? Speak English!" – do not buy this fund. Don’t invest in what you don’t know, and don’t risk what you can’t afford to lose.
On a personal note: I will be directly investing in stocks, not buying this fund or any other such fund.