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.
Likhitha Infrastructure IPO Opens on Sep 29, 2020.