Should you invest in the Tata Infrastructure Fund?

t a time when the Sensex is scaling new peaks, a new fund has decided to hit the market. 

• A dummies guide to the Sensex 

We did explain in our earlier article, Should you avoid mutual fund IPOs?, why it is not a good idea to invest in a mutual fund when the stock market is enjoying a bull run.

Let's start with the facts

When you can buy the units...

Till December 22 when each unit is being sold for Rs 10.

It will then close to the public for a short time (not later than January 21, 2005).

After that, it will reopen for continuous sale and repurchase. That's when you will have to buy it at the Net Asset Value (To understand what NAV is, read Should you avoid mutual fund IPOs).

The mimimum application amount is...

Rs 5,000.

But, should you decide to invest Rs 5,000, you won't end up with 500 units (5,000 divided by 10). That's because an entry load of 2.25 percent of the amount invested will be charged. This is the fee you pay when buying the units of a mutual fund.

Don't raise your eyebrow. It's common to nearly all open-ended funds. They either charge an entry or exit load (when you sell your units). This means you will pay Rs 125 as an entry load and the balance will be invested. Rs 5,000 will get you 487.5 units.

Where the money will go...

Broadly, TIF plans to invest 70 percent of its net assets in companies in the infrastructure sector. The sector comprises:

• Energy
• Power
• Power Equipment
• Oil and Gas and allied industries
• Coal
• Mining
• Aluminium and other metal industries
• Steel and Steel Utilities
• Engineering
• Construction
• Cement
• Transportation
• Ports
• Telecommunications
• Housing
• Banking and Financial Services and Health Related Industries

The remaining 30 percent will be invested in debt (fixed income investments like bonds, fixed deposits, etc) or money market instruments (fixed income investments that mature within a year and are not usually available to individuals). 

Pros first

~ Being an open-ended fund, should you want to sell your units, it will not be a problem. You will be able to sell them back to the fund whenever you want to and, within a few days, the money will be given to you.

~ Should you want to buy more units, that's not a problem either. An open-ended fund will issue as many shares as the investors demand.

~ India should be spending huge amounts on infrastructure. According to a report by the Centre for Monitoring Indian Economy, India needs Rs 7,00,000 crore to be invested in infrastructure. Even if a fraction of this estimate materialises, TIF will gain tremendously.

~ TIF has the potential of creating long-term value from expected investments in infrastructure-oriented sectors. One can conservatively expect a return of 40-50 percent over a period of six-seven years.

The cons now

Sector funds are more risky than others

If the companies within that sector do well, the mutual fund's NAV rises. If not, it drops.

Normally, in a diversified equity fund, investments are made in companies from different sectors. So, if one sector is not doing well, the investments in the other sector will balance it.

For example, if a mutual fund manager invests in the banking, infotech, infrastructure and automobile sectors and the automobile sector fails, then the performance of the other three sectors will help keep the NAV up.

TIF, however, will only invest in companies in the infrastructure sector.

There aren't many great companies around

TIF's investments will be limited to infrastructure related companies. And there is a dearth of quality infrastructure companies.

The Securities and Exchange Board of India, which is the market regulator, prohibits any mutual fund from investing more than 25 percent of its net assets in listed (this means the company is registered on the stock exchange for buying and selling shares) securities with the same group of companies that the fund belongs to.

Now if one took the example of the Tata group, TIF will have to limit its investments in infrastruture related companies like Tata Steel, Telco, Tata Motors, Tata Power, Tata BP Solar India and VSNL.

Don't underestimate the political angle

Indian companies, whether public or private, do not show urgency to execute infrastructure projects within the given timeframe. Take for example the Dabhol Power Corporation and Mumbai-Pune Expressway.

This results in eroding the value of the investment in the project.

Also, the opening up of the infrastructure sector to private/ foreign ownership/ investment depends on the whims and fancies of the Government of India and they flop more than they flip.

The timing

TIF's plan to invest 30 percent in debt/ money market instruments comes at a time when interest rates are moving up. Generally, the value of debt instruments (bonds, gilts, etc) decreases with the rise in interest rates and vice-versa.

TIF is entering the market when it is at historic high -- the price of the shares of quality infrastructure companies are at a 52-week highs.

For a clearer understanding on interest rates and entering the market in a bull run, read What to do with your money.

What if you want to sell your units?

They will charge you if you think of packing off too soon.

If you exit within a year, an exit load of 2.25 percent is slapped on your investment.

So, even if the units are still worth Rs 10, you will get less than that amount after you pay the load.You actually get only Rs 9.78 per unit.

You can escape this fee by waiting a year before you sell your units.

Here's the verdict

• If you are looking for quick returns, forget it.

  Infrastructure projects by their very nature have a long gestation period.

  TIF is relying heavily on future investments in the infrastructure sector which will take a long time to materialise.

• Ask yourself if you really want to invest in a sector fund.

If you have no investments in equity, then go for an equity diversified fund.

Check this one out only if you have money in shares and would like to invest in a particular sector.

• If you have decided in favour of the fund, then it would be better to wait till the fund picks up momentum.

Watch and see how it is performing. If the performance is up to your expectations, then take the plunge.

If you would to read more about the scheme and whom you can contact to invest, you will find the details on the mutual fund website.

DON'T MISS!
• Make your money work for you: Investing in mutual funds
• Select the right mutual fund

Illustration: Dominic Xavier