Definition

Infrastructure Fund

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What are infrastructure funds?

Infrastructure funds are those funds that invest in infrastructure companies or stocks. The companies engaged in the infrastructure sector are targeted for investment purposes. Like other sectors such as banking, technology, medicines, minerals; the infrastructure sector is also a very broad sector. Infrastructure includes waste management, utilities, sewer services, water services to name a few. These funds are mainly utilised to reduce the overall volatility of the portfolio

Summary
  • Infrastructure funds invest in infrastructure companies or stocks.
  • The companies engaged in the infrastructure sector are targeted for investment purposes.
  • Infrastructure includes waste management, utilities, sewer services, water services to name a few.
  • Infrastructure funds are mainly utilised to reduce the overall volatility of the portfolio.

Where do infrastructure investors invest in?

Investors who are looking to make an investment in the infrastructure funds can make investments in the following areas –

  • Electric and other utility services.
  • Sewage and water services.
  • Waste management companies.
  • Rail travel companies.
  • Freight and shipping services.
  • Engineering and construction.
  • Oil and gas pipelines.
  • Airports.
  • Law enforcement
  • Emergency services.
  • Education services.
  • Agriculture and farming.
  • Communications services.

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What are the types of infrastructure funds?

The infrastructure fund types are created based on the different investment objectives they help in fulfilling. The types will highlight the global infrastructure fund and the US infrastructure funds.

PAVE – Global X US Infrastructure Dev ETF – It is an exchange traded fund and the fund aims to match the US Infrastructure Development Index’s performance. The fund includes engineering and construction companies. Fund also include industrial transportation, heavy construction and raw material producing companies.

GLIFX – Lazard Global Listed Infrastructure Port – The main aim of the fund is to enhance the total return by making a bulk of investment in infrastructure companies that are engaged in railroads, utilities, telecommunication, ports, and airports industries.

FGIAX – Nuveen Global Infrastructure Fund – This fund has a dual goal, first is to generate income and second, long-term capital growth. The fund is directed towards both international infrastructure companies and US infrastructure companies. 25% of the funds are invested in developing markets that provide infrastructure related services.

MTIPX – Morgan Stanley Inst Glbl Infras port – 100% of the funds are invested in the international infrastructure companies. The investment is not diversified as the investment is focused solely on infrastructure sector.

GII – SPDR S&P Global Infrastructure ETF – It is an exchange traded fund (ETF) which attempts to match the S&P Global Infrastructure Funds’ total return. The index is composed of 75 infrastructure companies that are traded publicly in the US.

What are the advantages of infrastructure funds?

There are numerous reasons due to which infrastructure funds are attractive to most investors. The returns delivered by the infrastructure fund are stable in nature. The stability in the return is observed because the demand for infrastructural products and services is generally stable irrespective of the economic conditions. For instance, Morningstar reported that an infrastructural fund delivered an 8.41% average return for 10 years in the fourth quarter of 2018. Although the return is not strong when compared to the information technology and consumer products sector, still the returns are stable.

In the situation of recession or during the downturn of the economy, investment in infrastructure funds is made as a defence mechanism as these funds are less volatile in comparison to other sectors.

An infrastructural facility such as rail lines, bridges and roads are tangible assets and have the capability to generate cash if assets are maintained properly. The positive cash flow will not be affected by the rising prices or inflation. For instance, in an infrastructural contract, a clause might be present which states that the adjustment will be made as per the inflation within the economy.

Infrastructure funds can be used to diversify the portfolio as the infrastructural funds are less affected by the volatility in the stock market in comparison to most of the companies. Therefore, it provides insulation.

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What are the disadvantages of infrastructure funds?

It is a well-known fact that there is a direct relationship between the risk and return, that is higher the risk component, the higher will be the return. In the infrastructure funds, the risk is generally low, therefore the returns generated by the infrastructure funds are lower than the S&P 500 returns.

However, still, the investor makes an investment in the infrastructure funds because of the difference in the investment objective. For instance, if an investor wants to generate income through dividends, then infrastructure funds is a better choice.

On another hand, if an investor wants to make a quick income, then infrastructure funds are not the right choice. Especially in the case of the retirement portfolio, dividend income is suitable.

How investment should be made in infrastructure funds?

Shares in the infrastructure fund can be bought through any online brokerage account. Investment can also be made through the 401(k) fund option or IRA by checking in advance whether ETFs and infrastructure funds are included or not.

When an investor makes a comparison among the infrastructure funds, then it is suggested to assess the funds cost along with the expense ratio. Furthermore, an investor should also check whether the fund is diversified or non-diversified, where investment is made and the historical performance of the fund.

If the investor presently holds any investment in other funds, then while making the investment decision, an investor should check the chosen infrastructure fund with the existing funds to avoid overlapping. There can be a possibility that the investor has invested in the ETF which is also a part of the infrastructure fund. No investor would like to direct their funds in a particular sector and increase the overall risk of the portfolio.