Investor query: Should I allocate 10–15% to infrastructure funds given their long-term returns but cyclical risks?

I am evaluating whether to invest in infrastructure funds given the sector’s long-term growth story but also its cyclical nature. Despite heavy government spending, these funds lost 5.6% in the year ended September 9, 2025, underperforming flexi-cap funds. With projects like smart cities, renewable energy, logistics, and digital infra in focus, growth prospects look strong, but volatility, debt risks, and concentration risks worry me. Should infrastructure funds be part of a diversified portfolio, and if so, what is the ideal allocation (say 10–15%)? Are passive index-tracking infra funds preferable over actively managed ones for reducing risk?

Advice by Rajani Tandale, Senior Vice President, Mutual Fund at 1 Finance

Infrastructure as a theme certainly aligns with India’s long-term growth story—government spending on roads, smart cities, renewable energy, logistics, and digital infrastructure will remain a key driver for the economy. However, by design, infrastructure funds come with higher cyclicality, concentration in a few sectors, and exposure to leverage and execution risks. The fact that they underperformed flexi-cap funds in the last year (–5.6% vs. positive returns) is a reminder that sectoral themes can lag broader diversified strategies, even when the long-term outlook looks promising.

The risks are evident in market downturns. In the recent correction, infrastructure funds on average fell by about –25%, compared to around –18% for flexi-cap funds. In fact, the top five flexi-cap schemes limited their losses to just –7% to –15%, showing how diversification helps cushion volatility.

Sectoral funds, therefore, are not an essential part of a retail investor’s portfolio. They demand very active monitoring and sharp entry/exit timing, which most investors struggle with. More often than not, retail investors enter such funds late—after the news has already been priced in—only to face disappointment when the cycle turns. It is also a common myth that one needs sectoral funds for sector exposure. In reality, diversified funds like flexi-cap schemes already take sector calls dynamically, adjusting portfolios as sector trends evolve.

Holding a token allocation—say less than 5%—in an infra fund will not materially move your portfolio and is therefore not worth the effort or the risks. And whether you choose active or passive infra funds, the core problem remains: no one guides you on when to sell. This means investors can easily get stuck and end up exiting at the wrong time.

Infrastructure Mutual Funds

Sectoral-Infrastructure Mutual Funds are equity funds that focus exclusively on companies involved in infrastructure development. These funds invest in sectors such as construction, power, transportation, and telecommunications, aiming to benefit from the growth and expansion of India’s infrastructure ecosystem.

Advantages and Considerations: Investing in sectoral-infrastructure funds can offer high returns when the infrastructure sector is performing well. However, they lack diversification, meaning that if the sector faces a downturn, your investment may suffer significantly. Financial experts typically recommend allocating no more than 10% of your portfolio to such funds. Due to the cyclical nature of infrastructure, investors should be prepared for long-term commitments, ideally staying invested for at least 7 years or more to ride out sectoral fluctuations.

Top Performing Funds: Some of the leading schemes in this category include ICICI Prudential Infrastructure Fund (Rs 7,863 cr, 28.87% p.a.), LIC MF Infrastructure Fund (Rs 1,025 Cr, 27.95% p.a.), HDFC Infrastructure Fund (Rs 2,522 Cr, 27.69% p.a.), and Canara Robeco Infrastructure Fund (Rs 912 Cr, 26.88% p.a.). Other notable options include Franklin Build India Fund, Nippon India Power & Infra Fund, and DSP India T.I.G.E.R. Fund, all delivering strong annualised returns over a five-year period.

Investors seeking exposure to India’s infrastructure growth can consider these funds while maintaining portfolio diversification and a long-term investment horizon.