5 Railway Mutual Funds to Ride the Growth of India’s Rail Network

July 10, 2024 Mutual Fund

Editor note – This is an updated article with the latest data and mutual fund schemes that hold a higher allocation to railway stocks.

The Indian Railways, often dubbed the lifeline of the nation, holds a pivotal place in the country’s economic and social framework. Established in 1853, the network has evolved into one of the largest and busiest rail networks in the world, playing a crucial role in the transportation of passengers and goods across the vast expanse of India.

The Indian railway industry has been the backbone of the country’s transportation system, from bustling metropolises to remote villages, millions of Indians rely on the railways for economical and effective transportation.

After the US, China, and Russia, India has the fourth-largest railway system in the world due to its extensive network of rail tracks that almost encircle the whole country. More than 1.4 million people are employed along its 67,850 kilometres of travel. As a result, the railway industry is India’s largest employer.

In addition to being an economical and energy-efficient form of transportation, the railway network is renowned for its suitability for long-distance travel and the transit of large commodities. The Indian Railway stands out as the favourite auto transporter in the nation.

The Indian Railways, which have a long history dating back more than 160 years, have continuously changed and adapted to meet the expanding demands of a growing economy.

Under the Atmanirbhar Bharat vision, the Indian Railway Industry has recently undergone significant reforms and modernisation initiatives. The introduction of high-speed trains such as the Gatimaan Express, Tejas Express and the recently introduced Vande Bharat express reflects India’s commitment to improve travel conditions and shorten travel times.

As of 2024, Indian Railways operates the fourth-largest railway network in the world, with a route length of over 67,000 kilometers and more than 7,000 stations. It serves over 23 million passengers and transports around 3 million tonnes of freight daily. The network is a major employment generator, providing jobs to over 1.3 million people.

While traditionally, the sector has been operated by government-owned businesses; regulators are progressively moving toward privatisation, especially in the areas of engineering, ticketing, as well as other maintenance and operations.

The implementation of digital platforms and mobile applications has streamlined ticketing processes, making it more convenient for passengers to book tickets and access information.

Government’s boost to Indian Railway Industry…

It has always been important to upgrade India’s railway system, but never before has the government expressed such a keen interest. The news that the Indian government would implement a production-linked incentive (PLI) scheme for manufacturers of train components gave the railway industry a significant boost last month.

Recently, the Indian-made 1.54 million (m) forged wheels were ordered by the railways. This is a step in the nation’s drive to draw in international manufacturers and lessen its reliance on imports.

[Read: 5 Best Mutual Fund Types to Benefit During Modi’s Third Term]

In the Union Budget 2024, allocation for Indian Railways has been significantly increased, with a focus on capital expenditure for infrastructure development. The allocation for 2024-25 stands at a record Rs 2.4 lakh crore, a substantial increase from the previous year. This increased funding will support various projects, including track doubling, gauge conversion, and electrification. Part of the funds will be used for the Railways’ ambitious plan to lay approximately 100,000 km of new track over the next 20-25 years.

Sustainability is a major focus in Budget 2024. The government has announced several green initiatives to reduce the carbon footprint of Indian Railways. Expansion of solar power projects to harness renewable energy for railway operations.

The goal is to achieve 100% electrification of the broad-gauge network by 2030 and to meet a significant portion of energy requirements through solar power. Installation of bio-toilets in all trains to ensure better sanitation and environmental sustainability. As on January 31, 2024, 41 trains of the Vande Bharat service are running on the Indian Railways, linking states with a Broad Gauge (B.G.) electrified network.

As a result, the process of enabling Foreign Direct Investment (FDI) in railways to upgrade the infrastructure for goods and high-speed trains has advanced fast. Several domestic and international businesses are currently exploring to invest in rail projects in India.

In this article, we will explore the Indian railway industry and identify the potential investment opportunities for investors willing to enter this sector.

About Indian Railway Stocks

Due to its scale and extensive network of connections to many industries, the Indian railway industry may experience a growth in demand for its services. As a result, India will likely experience a forward push for the Indian Railway Stocks.

In fact, not only will this demand increase the share price of the railway, but also of the businesses that produce railway components. There are a number of businesses on the market that produce elements like wheelsets, truck frames, and other structural and stability components for cargo, waggons, and passenger coaches.

In the past year, Indian railway stocks have demonstrated a mixed performance, reflecting broader market trends and sector-specific developments. Key players in this sector, such as Indian Railway Catering and Tourism Corporation (IRCTC), Rail Vikas Nigam Limited (RVNL), and Indian Railway Finance Corporation (IRFC), have been under the spotlight due to their strategic importance and government initiatives.

These stocks have generally shown resilience, buoyed by the government’s push for infrastructure development and modernization of the railways. This rapid price appreciation has caught everyone’s attention in the market; many investors are interested in Railway Stocks these days.

[Read: Top 5 Mutual Funds Paving the Way to Wealth with Indian Road & Highway Stocks]

Railway Stocks were the primary driver of one of the first large investment surges in India, and over a century later, the railways are still crucial to the economy. Businesses in the railway sector that provide rail transportation for people and goods make up the Railway stocks sector. This also includes businesses that carry out maintenance and switching tasks.

Here’s a list of the top Railway Stocks in India in 2023:

• Indian Railway Catering & Tourism Corporation (IRCTC)
• Indian Railway Finance Corporation (IRFC)
• BEML Ltd. (Bharat Earth Movers Limited)
• Container Corporation of India Ltd. (CONCOR)
• Rail Vikas Nigam Ltd.
• Titagarh Rail Systems
• Railtel Corporation of India, etc.

*(The securities quoted are for illustration only and are not recommendatory).

The Future of Indian Railways: How to Invest in This Growing Sector

Given increased incomes and population expansion, there will undoubtedly be an increase in the demand for railway services. With around 22,593 active trains (9141 freight and 13,452 passenger trains), India has the fourth-largest railway network, carrying 24 million passengers daily and 203.88 million tonnes of freight.

Freight and passenger numbers have continually increased for the Indian Railways since 2015-16. The industry was entirely destroyed by the pandemic, and all passenger railway service-aside from those for freight and migrant workers-was stopped.

Nevertheless, post-pandemic with increasing urbanisation and rising income (both urban and rural) is driving growth in the passenger segment. The total passenger revenue stood at USD 8.51 billion during 2022-23. Revenue growth has been strong over the years; the Indian Railways completed total revenue of Rs 2.40 lakh crore (US$ 28.75 billion) by the end of FY24.

India’s Railway industry is on the cusp of a revolution, which will open up more opportunities for businesses in India, especially tourism. In India, unlike the United States of America, the government continues to control the railway sector. The government has just recently been considering the admission of private players to operate stations, manage routes, and run trains.

Thus, it can be said that the earnings of the listed Railway Stocks are directly dependent on the growth of the Indian railways as a whole and the initiatives of the government.

To enable the nation to connect its rail network with other modes of transportation and create a multi-modal transportation network, the government will construct a ‘National Rail Plan.’

The Research Designs & Standards Organisation (RDSO), the research division of Indian Railways, has introduced a ‘New Online Vendor Registration System’ to have digitised and open systems and processes. Indian Railways claims that these projects have the potential to attract significant investment in the upcoming years.

With 15,000 km being converted to automatic signalling and 37,000 km being equipped with ‘KAVACH’ the domestically built Train Collision Avoidance System, Indian Railways is generating and developing technology in fields like signalling and telecommunication.

Rail infrastructure will see an investment of Rs 50 lakh crore (USD 715.41 billion) by 2030. FDI inflows in railway-related components stood at USD 1.40 billion from April -December 2023, and the government has allowed 100% FDI in the railway sector.

The Indian Railway network is expanding in a positive direction. The Indian Railway market is anticipated to account for 10% of the global market in the next five years, making it the third largest.

Understanding the significance of railway shares in your investment portfolio as a savvy investor can open up a world of opportunity, providing stability and growth. The most prudent way for investors to invest in Indian railway stocks without the high risk of direct equities is via mutual funds.

[Read: Power Your Portfolio: 5 Sector & Thematic Funds to Consider Around General Elections]

Let’s dive deep into the world of Indian Railway stocks. Below I have mentioned the top 5 mutual funds holding high exposure to these rail sector stocks.

#1 – Quant PSU Fund (Sectoral Fund)

Quant PSU Fund invest predominantly in equity/equity-related securities of Public Sector Undertakings (PSUs). The scheme currently has an AUM of Rs 917.08 crore and is benchmarked against S&P BSE PSU – TRI. It invests across the market cap, and as of June 30, 2024 it holds 41.1% allocation in large caps, 23.6% allocation in mid-caps and 26.6% in small caps.

Do note that the scheme holds a higher exposure to mid and small-cap stocks. Before considering investing in this scheme, one must consider their suitability based on risk appetite and investment horizon.

Quant PSU Fund – Allocation to Railway Stocks

Data as of June 30, 2024
Do note past performance is not an indicator of future returns
The securities quoted are for illustration only and are not recommendatory.
(Source: ACE MF, data collated by PersonalFN Research) 

The scheme holds an overall allocation of 24.4% in Railway stocks as of June 30, 2024. The major allocation of 8.27% is in stocks of Container Corporation of India Ltd., a Public Sector Enterprise under the Ministry of Railways with the prime objective of developing modern multimodal transport logistics and infrastructure to support the country’s growing international trade. It is a Navratna Company engaged in the transportation and handling of containers by rail transport.

Apart from this, the scheme has a similar allocation to BEML Ltd. and IRFC Ltd. which is a Schedule ‘A’ Miniratna Public Sector Enterprise under administrative control of the Ministry of Railways, Government of India.

#2 – Quant Momentum Fund (Thematic Fund)

Qunat Momentum Fund invests invests in a diversified portfolio of equity and equity-related instruments. The selection of these instruments will be based on a quantitative model meticulously designed to identify potential investment opportunities that exhibit the potential for significant capital appreciation over the specified investment horizon.

The scheme invests across market cap, and as of June 30, 2024, it holds 39.36% allocation in large caps, 20.13% allocation in mid-caps, and 24.14% in small caps. Do note that the scheme holds majority of it’s assets in mid and small-cap stocks, which are highly volatile and risky in nature. Ensure your suitability to the fund before considering any investment.

Quant Momentum Fund – Allocation to Railway Stocks

Data as of June 30, 2024
Do note past performance is not an indicator of future returns
The securities quoted are for illustration only and are not recommendatory.
(Source: ACE MF, data collated by PersonalFN Research) 

Currently, the scheme has an AUM of Rs 2,126.40 crore, and it has an overall allocation of 11.82% to Railway stocks. The scheme holds a fair allocation of 6.69% in Container Corporation Of India Ltd. and 5.13% in IRCTC Ltd., offers various customer services and facilitation in railway catering, hospitality, travel and tourism with best industry practices. The Indian Railways has authorised IRCTC as the only entity to sell train tickets online, offer food and catering services, and supply bottled drinking water to Indian railway stations and trains.

#3 – Invesco India PSU Equity Fund (Sectoral Fund)

Invesco India PSU Equity Fund invests in a concentrated portfolio that is predominantly constituted of equity and equity-related instruments of companies where the Central / State Government(s) has majority shareholding or management control or has powers to appoint majority of directors.

As of June 30, 2024, the fund has a 69.46% allocation in large-cap stocks and 20.72% in mid-cap stocks, whereas 6.8% in small-cap stocks.

Invesco India PSU Equity Fund – Allocation to Railway Stocks

Data as of June 30, 2024
Do note past performance is not an indicator of future returns
The securities quoted are for illustration only and are not recommendatory.
(Source: ACE MF, data collated by PersonalFN Research) 

The scheme holds an overall allocation of 11.40% in Railway stocks; it includes exposure to market leaders in the Indian Railway industry – like 4.06% in BEML Ltd., which is a PSU under the Ministry of Defence, Govt. of India and plays a pivotal role in manufacturing a variety of heavy equipment, such as that used for earth moving, railways, transport and mining. Further, the scheme has around 3% of allocation to Container Corporation Of India Ltd. and IRCTC Ltd.

#4 – Samco Special Opportunities Fund (Thematic Fund)

Recently launched on May 17, 2024, Samco Special Opportunities Fund aims to invest predominantly in a portfolio of securities that are involved in special situations such as restructurings, turnarounds, spin-offs, mergers & acquisitions, new trends, new & emerging sectors, digitization, premiumization, and other special corporate actions. The scheme invests across market caps with a major allocation of 42.24% to small caps, 29.31% and 22.90% to large cap and small cap stocks respectively.

Samco Special Opportunities Fund – Allocation to Railway Stocks

Data as of June 30, 2024
Do note past performance is not an indicator of future returns
The securities quoted are for illustration only and are not recommendatory.
(Source: ACE MF, data collated by PersonalFN Research) 

As of June 30, 2024, the scheme has an overall allocation of 6.07% to Railway stocks. Samco Special Opportunities Fund also invests in Rail Vikas Nigam Ltd., which works as the construction arm of the Ministry of Railways for project implementation and transportation infrastructure development. The organization undertakes project execution from concept to commissioning and creates project-specific SPVs.

Bear in mind that the scheme is new in the market and does not carry a long performance track record; thus, investors may consider their suitability before investing in this scheme. Additionally, do note it holds major allocation to small cap stocks which are considered to be highly risky in nature.

#5 – HDFC Defence Fund (Sectoral Fund)

HDFC Defence Fund aims to generate long-term capital appreciation by investing in in equity and equity related securities of Defence & allied sector companies. Launched in June 2023, the scheme holds an AUM of Rs 3,232.88 crore and is benchmarked against Nifty India Defence TRI.

The scheme invests across market cap, holding a allocation of 47.54% in large cap stocks, 5.78% in mid caps and 41.78% in small cap stocks. A higher allocation to small caps suggests the scheme is highly risky and investors must ensure their risk profile before investing.

HDFC Defence Fund – Allocation to Railway Stocks

Data as of June 30, 2024
Do note past performance is not an indicator of future returns
The securities quoted are for illustration only and are not recommendatory.
(Source: ACE MF, data collated by PersonalFN Research) 

The scheme holds an allocation of 5.95% in one of the leading companies under the Indian railway industry, BEML Ltd., formerly know as Bharat Earth Movers Limited, which manufactures a variety of heavy equipment, such as that used for earth moving, railways, transport and mining.

This marks the conclusion of our article discussing the best Railway Mutual Funds that an investor seeking exposure to Railway stocks may consider.

To summarise…

For investors seeking to diversify their portfolios and take advantage of the growing potential of the Railway industry, the Union Budget’s announcement of new projects, renovation of premium coaches, and increased funding for track restoration presents a compelling opportunity.

Additionally, the factor that makes Railway stocks an attractive investment opportunity is the government’s dedication to enhancing the nation’s transport infrastructure.

All things considered, it is clear that Railway stocks will always be in demand because of their high sustainability and growth potential. However, investors may position themselves to ride the rails of success in the ever-evolving world of Railway stocks by adopting a diversified approach, a long-term outlook, and remaining well-informed.

Prior to investing in Railway stocks through mutual funds, one must take into account their suitability for the fund, undertake thorough research of the holding railway companies, and evaluate the performance of the mutual fund schemes.

This article first appeared on PersonalFN here