Should you invest in infrastructure sectoral funds?

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The development of the country’s infrastructure sector is progressing rapidly. With the government’s Viksit bharat mission, there are hopes of further acceleration in this sector. Finance Minister Nirmala Sitharaman has announced several major policy reforms for the infrastructure sector in this year’s interim budget, aiming to advance the ‘Vikas Bharat’ mission. An allocation of Rs 11.11 lakh crore has been made for the infrastructure sector in this budget, which is approximately 3.4% of GDP.

This is the fourth consecutive year that the infrastructure sector budget has been increased, and its far-reaching impact has been observed on investment options. For instance, infrastructure sectoral mutual funds have provided returns of over 60% on average in a year. However, these funds are not suitable for everyone. Investors should not rush into investing in this sector’s funds. Understanding the products is crucial before investing. Now, let’s delve into what infrastructure sectoral mutual funds are and whether you should invest in them.

Sectoral funds are equity mutual funds that invest up to 80% in shares of a specific sector, including sectors like banking, pharmaceuticals, and technology. Schemes that invest in stocks of infrastructure companies are called sectoral infrastructure funds, which include companies related to electricity, railways, and ports. The government is providing significant support to the infrastructure sector. In favorable market conditions, sectoral funds can provide excellent returns, as seen with the infrastructure sector.

In terms of returns, as of February 28, sectoral infrastructure funds have provided an average return of 62% in the past year, 31% over three years, and 25% over five years. Comparatively, the S&P BSE India Infrastructure Total Return Index has provided impressive returns of 112%, 40%, and 29% over the same periods. These trends indicate positive growth in the infrastructure sector, which is a good sign for investors considering sectoral infrastructure funds.

Should you also invest in infrastructure sectoral funds? It’s important to understand that sectoral funds are quite risky because all the money in this scheme is invested in one sector, often focusing on a few companies. When the stock market performs well, sectoral funds deliver good results. However, during market downturns, they can turn into a disaster, potentially leading to significant losses.

Shweta Jain, founder of Investography, advises new investors to stay away from sectoral funds. However, experienced investors can allocate 5 to 10 percent of their portfolios to them. Investing in sectoral funds should only be considered when you have good knowledge of the sector and are fully prepared to take on significant risks. Investors should carefully consider that the performance of sectoral funds is closely related to the economy’s growth.

After investing, it is now time to know about for taxation on earnings from sectoral funds. Sectoral funds fall under the equity category. If units of an equity fund are sold within one year, the returns are considered Short-Term Capital Gains (STCG) and taxed at a rate of 15%. Similarly, if units of an equity fund are sold after at least one year, the benefit is considered Long-Term Capital Gains (LTCG). LTCG in equity funds is subject to a flat 10% tax. However, it’s important to note that tax is applicable only when an investor gains more than Rs 1 lakh in a financial year. This means that gains up to Rs 1 lakh in equity are tax-free.

Sectoral funds are among the riskiest mutual funds because they primarily invest in one sector, lacking diversification, which is a major initial risk factor. Only experienced and seasoned investors should consider investing in sectoral funds, and they should not allocate more than 10 percent of their portfolios to these funds. For new mutual fund investors, it’s wise to steer clear of sectoral funds.