Exploring InvIT: Smart Investment Choices

The economic development of any country is based on infrastructure; India is no exception. With rapid urbanization and industrial expansion, rising demand is leading to tremendous improvements in infrastructure. This has led to the emergence of a new range of financial products such as Infrastructure Investment Trusts (InvITs), which allow both institutional and private investors to directly help develop a country’s infrastructure.

This post will take a detailed look at what InvITs are, their structure and how they differ from REITs (Real Estate Investment Trust), advantages and disadvantages of Invite investments. In conclusion, you will gain a smart understanding of infrastructure investments. It is worth considering the activities of the trust and a worthy investment path.

What are invitations?

It is an investment vehicle or instrument that pools money from various investors into infrastructure projects. Essentially, it invests the collected money in stocks or bonds, similar to a mutual fund. The full form of InvIT is Infrastructure Investment Trust. Thus, it appears that these trusts are designed to direct investments into income-producing assets such as roads, bridges, power plants and telecommunications networks. In fact, this would be an excellent opportunity to create long-term, stable income positions for investors and, at the same time, support important infrastructure projects usually developed from state budget resources.

Although it is a new class of investment in India, SEBI’s introduction of InvITs rules in 2014 has paved the way for investment. Thus, this allows InvIT to attract funds from investors for the development of an infrastructure project. Thus, the income generated from such projects is distributed as dividends to investors, providing a regular income stream.

Invite structure

The architecture of infrastructure investment funds is similar to that of mutual funds with four components:

1. Sponsor:

The minimum net worth of the sponsor should be Rs 100 crore. The sponsor will be required to hold at least one-fourth of the InvIT units for three years.

2. Authorized person:

This ensures that the InvIT works in the interests of investors and becomes a tool for monitoring project performance. The Trustee must be separate from the Sponsor. He cannot have a direct financial interest in the trust.

3. Investment manager:

The company responsible for managing assets and investments, InvIT, is an investment manager. Making important decisions about which infrastructure projects to invest in and determining how to maximize returns for investors are the responsibilities of an investment manager.

4. Project manager:

The project manager oversees the construction, operation and maintenance of the infrastructure assets that the InvIT will finance.

How InvITs differ from REITs

Although the structure and management are similar, InvITs differ from REITs in the application of the former to different sectors. Since REITs typically invest in real estate assets such as commercial properties, shopping malls and residential complexes, InvITs will exclusively engage in infrastructure projects.

So, here are some major differences between InvIT and REIT:

Asset class:

While InvITs invest in infrastructure projects such as roads, highways and power plants, REITs invest in income-generating properties.

Investment horizon:

Generally, the investment horizon for InvITs is much longer than for REITs. This is because an infrastructure project takes several years to realize benefits.

Liquidity:

The general consensus is that REITs are more liquid due to their lower unit prices and can therefore be more accessible to smaller investors. InvITs typically require a higher initial investment and are therefore less accessible to retail investors.

Risk profile:

Infrastructure projects do face regulatory and operational risks. Hence, InvITs are considered to have a higher risk profile as compared to REITs.

The difference in details will help an investor make an informed decision while choosing between an InvIT and a REIT investment.

Benefits of investing in InvITs

1. Regular income:

The regular income that an investment in InVIT returns is one of its biggest advantages. By law, at least 90% of the net distributable cash flow must be distributed to investors as dividends. Hence, they are a great option for those looking for income.

2. Diversification:

Infrastructure investment trusts allow you to achieve portfolio diversification. Typically, the returns of traditional asset classes such as equities and fixed income do not correlate with the returns of infrastructure assets. This provides some protection against market volatility.

3. Professional management:

Like mutual funds, InvITs are managed by professional investment managers with extensive experience in managing large infrastructure projects. This ensures maximum return and efficient use of money.

4. Tax benefits:

Dividend income from InvITs is now taxable as per the investor’s tax schedule following changes in the Finance Act 2020. However, interest and rental income from InvITs remain tax-exempt. Previously, dividend income was not taxed, but this benefit no longer applies.

5. Long-term development:

Infrastructure projects of any country form the basis of its development, in which the investor realizes long-term growth opportunities through InvIT investments.

Risks associated with investing in InvITs

All these investments in InvIT come with many risks:

1. Regulatory risk:

Changes in government policy or regulation can directly impact project performance. For example, a revision of the toll rate may affect the revenues to be generated from road projects and therefore the return to investors.

2. Inflation risk:

Most infrastructure projects have a long implementation period, and with high inflation, the cost of operation increases, which leads to a decrease in profitability.

3. Asset risk:

The large capital-intensive projects that InvITs typically invest in take several years to come on-stream, and thus delays or inefficiencies in these projects will result in lower returns.

4. Liquidity:

Investments in InvITs are relatively less liquid as compared to mainstream traditional investment modes such as stocks or bonds. This is especially true for small investors as the minimum investment amount in InvITs is quite high.

Prospects for InvIT in India

The future of infrastructure investment trusts looks bright for India. With the government’s emphasis on infrastructure and policies encouraging private sector participation, the demand for InvITs as an investment vehicle will increase.

Moreover, with the commissioning of more and more infrastructure projects, InvITs will provide regular income stream to investors and also cater to the demand for infrastructure in the country.

One such avenue is participation in public-private partnership transactions, where the financial burden can be removed from the government by inviting private investors into projects. An added benefit of InvIT investing in such critical infrastructure projects is ensuring their timely completion.

Conclusion

Risks aside, the clear benefits of diversification, stable income and expert management will make investing in InvITs attractive to long-term investors. With additional means of stable income, this is a great way to help India’s infrastructure industry thrive.

The key difference in understanding InvITs and REITs is inherently important for making informed investment decisions. Whether you are a high net worth individual investor or an institutional investor, InvIT offers a means of access to one of the most important components of the economy.

Thus, InvIT has an increasingly important position in the financing of infrastructure projects and is expected to maintain this position. Infrastructure Investment Trusts are a suitable investment opportunity for investors seeking stable returns and long-term growth.