India is a developing country, and in the past few years, we have seen data that shows India’s GDP growth rate is above all other developing nations.
Also, you would have heard numerous announcements of new roads, highways, power transmission lines, and gas pipeline projects. Why? Because infrastructure plays an essential role in a developing country’s growth.
Did you know you can also be part of this growth by investing in these projects? Let’s discuss how.
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Buckle up, here we go!
In our previous post, we discussed how to invest in Real Estate Investment Trusts (REITs) and get exposure to the real estate market in India. Did you know that while announcing REITs, the SEBI also announced Infrastructure Investment Trusts (InvITs)?
What are InvITs?
An Infrastructure Investment Trust, or InvIT, is a trust that owns and operates a portfolio of income-generating infrastructure assets, such as roads, highways, power transmission lines, warehouses, ports, and gas pipelines.
InvITs pool capital from individual and institutional investors and invest in a diversified portfolio of infrastructure assets. Investors in an InvIT receive dividends based on the income generated by the assets in the portfolio.
Introduced in 2014, InvITs are a relatively new investment option in India. IRB Infrastructure was the first InvIT to be publicly traded in 2017.
How do InvITs work?
Structure wise InvITs are similar to REITs with a sponsor, a fund management company (with a project manager), and a trustee.
The sponsor promotes the InvIT with its funds, and the fund management company selects and buys infrastructure assets for the portfolio. The project manager handles the day-to-day operations. The trustee ensures the funds collected are utilised and managed, keeping the investor’s interest in mind.
InvITs raise money from retail investors like us and from institutional investors. Then deploy that capital to acquire income-generating infrastructure assets.
The only difference between REITs and InvITs would be that InvITs invest in infrastructure assets like highways, power transmission lines, gas pipelines, etc.
The income generated from the assets is distributed to investors through dividends. They are supposed to share 90% of their income with the investors through dividends, interest income or loan repayment.
As of April 2023, only 3 InvITs are publicly listed on Indian stock exchanges. They are Powergrid Infrastructure Investment Trust, India Grid Trust, and IRB InvIT Fund. You can invest in them through your broker, just like you invest in individual stocks with a minimum investment of ₹100 to ₹200.
Thus, by investing in InvITs, you can be a part owner of the infrastructure assets bought by the InvITs. And receive regular income on a quarter or biannual basis through dividends.
How safe is investing in InvITs?
In India, InvITs are regulated by the Securities and Exchange Board of India (SEBI). InvITs must adhere to strict rules regarding portfolio diversification, leverage, and income distribution.
Apart from this, the SEBI has also set the below rules to safeguard the interest of retail investors like us.
- InvITs should invest 80% of the total capital in completed and income-generating infrastructure projects. They cannot invest over 20% in under-construction projects, Government securities, money market instruments, and liquid mutual funds.
- 90% of the net distributable cash flow should be distributed to unitholders (Investors) through interest or dividends.
What are the types of income generated from InvITs?
We can receive four types of income from your investment in InvITs.
- Interest income
- Dividend Income
- Loan Repayment
- Capital appreciation
The net distributable income of an InvIT comprises the dividend income received from the projects in the portfolio, minus the expenses incurred in managing the assets, such as asset management fees, maintenance expenses, and taxes.
InvITs also invest in or give loans to multiple Special Purpose Vehicle (SPV) entities that own income-generating projects or in-construction projects. The income or loan repayment received from these SPVs is also shared with us.
Whenever the InvITs distribute the dividends, they provide the break-up. To show how much of it is interest income, dividend income, and loan repayment/return of capital.
Why this break up? Because this break up will determine how much tax you need to pay. Taxation on income received through InvITs is a little complicated. We discuss taxation in another post.
As investors, we also earn from the value appreciation of the assets owned by the InvITs. If the asset value in the InvITs portfolio appreciates over time, the value of the InvITs shares may also increase. This allows us to earn a capital gain when we sell our shares.
However, capital appreciation is not guaranteed. It is subject to market fluctuations and economic conditions.
What are the benefits of investing in InvITs?
There are several benefits of investing in InvITs, including:
- Diversification: InvITs offer exposure to infrastructure projects, which increases your portfolio’s diversification and reduces risk and volatility compared to investing in a single asset.
- High dividend yield: InvITs distribute 90% of their income to investors through dividends. The dividend yield offered by them has been high.
- Professional management: InvITs are managed by experienced professionals with expertise in infrastructure projects. This ensures optimal performance of the infrastructure project with minimal hassles for you.
- Liquidity: InvITs are traded on stock exchanges, so you can liquidate them comfortably. Also, you can potentially sell your units at a profit and receive capital gains.
- Low investment: You can invest in InvITs with just ₹100 to ₹200 and gain exposure to India’s infrastructure growth.
What are the risks of investing in InvITs?
There are also risks associated with investing in InvITs, including:
- Market & regulatory risk: InvITs are subject to market risks and can be affected by changes in interest rates, economic conditions, and regulations. Infrastructure is a highly regulated sector in India. Since InvITs are at a nascent stage, the regulations are still evolving.
- Limited options: InvITs are new to Indian markets. Even though 20 InvITs are registered with SEBI, only 3 have been listed on stock exchanges. Hence, our choices are limited.
- Liquidity: Liquidity is low on the stock market because the number of active retail participants in InvITs is low. Therefore, liquidating InvITs investments can be challenging in times of emergencies.
- Taxation: Taxation of InvITs is very complicated. The interest income from InvITs is entirely taxable in the hands of the investor. Dividend income is taxed with conditions. This income will be a part of your taxable income. And it will be taxable as per the applicable tax rates.
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Still Curious?
If you are like me, who likes to analyse a little more or check out content in different formats, well you are in luck. Below you can find some suitable content we found.
Capitalmind – Which is the best InvIT in India?
ET Money – Why Infrastructure Investment Trusts (InvITs) are becoming Popular among Investors?
Forbes Advisor – What Are InvITs And How Do They Work?
Note: We don’t have any affiliation with them. We are sharing links only for educational purposes. The opinions expressed by them belong solely to them and do not reflect the views of Vrid.