What is an InvIT and why should investors have it in their portfolios?

InvITs look like mutual funds

InvITs, which function similarly to mutual funds (MFs), provide investors with units in exchange for their investments and allow for the pooling of capital from multiple investors, with specific management in charge of the assets.

The key distinction between an InvIT and an MF is that in the former, the funds are invested in infrastructure projects, while in the latter, the funds are in invested in diverse equity and debt instruments.

In both situations, the investors obtain ownership benefits.

What types of infrastructure projects do InvITs invest in?

InvITs usually invest in roads and operating highways, besides power generation, distribution, and transmission units.  InvITs may own and manage some of these assets. To put it simply, any infrastructure project ― as the name of the investment suggests ― is an option for an InvIT.

InvIT ― an alternative to your infrastructure investments

In contrast to infrastructure stocks or infrastructure MF schemes, InvIT is a new approach to investing in infrastructure projects with lesser risk. Direct stock purchases of companies involved in the infrastructure sector or the purchase of MF units with an infrastructure focus carries a significantly higher risk-reward ratio than investing in InvITs, which is much safer than the first two options.

Why InvITs are less risky than direct infra stocks/MF schemes?

InvITs are matured, stable assets; the stage of conceptualisation and implementation of the infrastructure project would already be over before the InvIT scheme comes into action. InvITs aim to optimise the matured operations, and hence, render them safer than investment in direct infra stocks/MF schemes.

Let’s take an example. Let's assume that a road has already been built, meaning that the said road project's conceptualisation and execution phases are over. With the implementation risk eliminated, a significant safety net comes into play. Then we look at the number of vehicles currently using the road. With this data in hand, you can calculate the toll collection. These mature assets are listed on the company's balance sheet.

You may also relate it to Real Estate Investment Trusts (REITs), where business operations start after a structure, for instance, a building project, is built.

How they operate?

InvITs list on stock exchanges to raise capital for the purchase of a portfolio of operational infrastructure assets, that is infrastructure assets already producing consistent cash flows.

Any asset that is able to produce consistent cash flows over time is eligible for ownership by InvITs.

SEBI rules regarding InvITs

Publically-listed companies are permitted to retain their profits and reinvest the same in the company rather than make dividend payouts. But unlike such traded stocks, the Securities and Exchange Board of India (SEBI) requires InvITs to allocate at least 80 percent of their total assets to completed, profit-generating infrastructure projects.

Second, InvITs are required to pay out at least 90 percent of their profits to unitholders. InvITs therefore, resemble a hybrid offering because both debt and equity-related features are offered here. These features make InvITs less risky, compared to stocks of infrastructure companies listed on stock exchanges.

Advantages of investing in InvITs

1. Diversification in a new asset class to get exposure to India’s booming infrastructure sector.

2. Professional management: The infrastructure project is professionally managed by qualified operators. This assures smooth and efficient operation of the infrastructure project.

3. Three-in-one returns: Capital gains, dividends, and interest.

InvITs can generate profits on their assets in three ways.

Dividends: InvITs generate revenues if the assets are held on their balance sheets. For example, if a road/highway project collects tolls, the revenue is distributed to unitholders once all expenses are met. Another form is where the InvIT holds assets through a Special Purpose Vehicle (SPV), its profits may be distributed to the InvIT in the form of dividends.

Interest: The InvITs may lend to the SPV in order to purchase and maintain assets, in which case it will earn interest on the said loans.

Capital gains: Just like shares, invITs are traded on the stock markets. Unit prices will, therefore, increase if the InvIT performs successfully. You could then sell your units for a profit and generate capital gains.

Easy liquidity: Since InvITs are listed on stock exchanges, they enjoy easy liquidity. This should work well for the majority of individual investors, with the exception of situations when the amount invested is too large.

Government incentives: The government of India has already begun developing the National Monetisation Pipeline (NMP), and increasingly leveraging the InvIT route to monetise assets held by government entities as well as encouraging widespread public participation.

The government has also accorded industry incentives to InvITs. In fact, the NHAI recently released the InvIT NCDs. More InvITs may soon be entering the market.

Regular Income: InvITs must pay out at least 90 percent of their revenues in the form of dividends and interest. This will make it possible for you to earn a consistent income.

Promising past returns: Before making an investment, you should check the returns and dividend and interest patterns of previously-listed companies like IRB invIT, PowerGrid invIT, and IndiGrid invIT.

What should investors do?

Since InvITs are a new asset class, one should only invest in them after understanding their risk profile, just as one would while investing in any other instrument. Those already investing in bank deposits, debt MF schemes, and other similar products may invest a small portion of their debt allocation in InvITs to better understand and take advantage of this new asset class.

Going forward

This is Part 1 of a three-part series on Invits and how investors can look at this new asset class as an investment opportunity. In the next two instalments, we shall dive deeper into InvITs, where we will cover the tax treatment of investor returns in the form of dividends, interest and capital gains, as well as the current performance and trends of listed InvITs.