Every passing month announces the dawn of a new infrastructure fund. While many fund houses have been quick to make the most of the infrastructure opportunity by launching NFOs (new fund offers), some fund houses like HDFC [Get Quote] Mutual Fund that have hitherto been averse to thematic funds have also taken the plunge.

The message that goes out to investors is that the infrastructure theme is something that only thematic funds can exploit and diversified equity funds are incapable of making the most of it. The more reputed the name behind the thematic fund greater is the investor's conviction.

There are so many infrastructure funds in the market today that most fund houses can now boast of managing one. So much so that even fund houses that were launched less than 12 months ago with just one equity fund in their portfolios, have been quick on the draw with their infrastructure NFOs.

For instance, take AIG Global Investment Group Mutual Fund. The fund house launched its maiden diversified equity fund offering as recently as May 2007. But that did not stop the fund house from launching an infrastructure fund as its very next offering barely 7 months later in January 2008.

Also interesting is the name of the fund -- AIG Infrastructure Economic Reform Fund (AIGIER), which sounds suspiciously like the relatively well-established TIGER (the infrastructure and economic reform fund from DSP ML Mutual Fund).

It's evident that as far as marketing is concerned, today there cannot be a bigger draw than infrastructure. Fund houses recognise this fact better than most and hence the rush to launch infrastructure funds.

While we are not suggesting that launching infrastructure funds is something wrong or unfortunate, it is noteworthy that not all fund houses have appeared as keen. Clearly certain fund houses were not comfortable investing in a single theme/sector knowing that when the theme runs out of steam exiting it is not really an option since they have a mandate to remain invested in it at all times.

These are the fund houses that remember the last major launch of sector/thematic funds in 2000, which resulted in unmitigated disaster. In a striking similarity to the present situation, many fund houses then had launched technology/media/telecom (TMT) funds in a bid to make the most of the opportunities in these sectors.

The sharp and sudden meltdown in technology stocks, put paid to their hopes, embarrassing many a fund house for its misplaced optimism. Of course, the TMT funds wished that they could disappear quietly. Unfortunately they couldn't since they were open-ended funds with a mandate to invest in TMT stocks at all times, meltdown or no meltdown.

Of course, fund houses are quick to advance the 'this time it's different' argument. Unlike the TMT theme, which was too narrow and therefore risky, the breadth of the infrastructure theme is a safety net that gives the fund manager considerable leeway while investing. This is the main rationale cited by fund houses, like HDFC Mutual Fund that were hitherto cynical about thematic funds, for a change in their stand.

When comparisons are drawn between the TMT and infrastructure themes, we agree with one point � there are considerably more investment options in the infrastructure theme.

Pick up the Offer Document of any infrastructure fund and you can be forgiven for wondering whether it's actually a diversified equity fund.

Excepting a few, albeit critical, sectors like pharma, auto/auto ancillaries, consumer products and durables most infrastructure funds are mandated to invest in just about any sector -- banks, metals, technology, among others. Of course, that is not to say that infrastructure funds are as diversified as any diversified equity fund; by omitting sectors like auto/auto ancillaries, consumer products and durables and pharma fund managers are ignoring some of the biggest long-term growth drivers for the Indian economy. A true blue diversified equity fund however, can make the most of these sectors as also the infrastructure theme.

We are sure that the question uppermost in your minds is � why should a fund house launch a thematic fund when it is as diversified as the next diversified equity fund? If the situation warrants, won't that fund house's diversified equity fund invest in the infrastructure-related sectors? The key words are 'if the situation warrants', which means that if the situation does not warrant it, then the fund house's diversified equity fund can exit some of the infrastructure-related sectors.

However, its infrastructure fund does not have the liberty to do that since it is mandated to remain invested in the infrastructure theme at all times. It cannot, as pointed out, invest in other sectors (consumer products, durables, pharma to name a few) with growth potential since that is beyond its mandate. This in our view is the key difference between infrastructure funds and diversified equity funds; not surprisingly this is something no fund house wants to talk about.

In our view, the rationale for launching infrastructure funds is not substantive enough regardless of the names behind those funds and their track records (reputed fund houses are keen to showcase their impressive track records, but that does not make the thematic fund a prudent investment).

We do not believe that there is a solid case for the average investor to invest in them. We say average investor, because there could be a case for the informed investor to invest in them since it is assumed that he has the research inputs necessary to invest in an infrastructure fund and redeem the same at an opportune moment.

Of course, this is a very small percentage of the overall investing population, which is why seeing so many (uninformed) investors invest in infrastructure funds brings back memories of the TMT frenzy and its aftermath.

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