Okay, so in the last couple of posts, we discussed what Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) are and how they work. We also discussed 4 incomes generated from investing in them and the taxation on these incomes.
Now comes the real question. Should you invest in REITs and InvITs? Will it provide you with stable income and decent asset allocation for your portfolio? Let’s discuss this.
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Buckle up, here we go!
Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) are popular investment options that have gained popularity in India over the last few years.
Both investment options offer the opportunity to invest in high-yielding assets and diversify our investment portfolios. But just like any investment, they come with some downsides as well.
Let’s first discuss the historical performance of REITs and InvITs in India. Then we can discuss the positives and negatives of investing in them.
Performance of REITs & InvITs in India
If you have been a long-time subscriber to our newsletter, you would know that we don’t analyse individual stocks or funds here.
So, continuing our tradition, we would again look into some index that broadly shows how REITs and InvITs have performed in India.
And to our luck, the National Stock Exchange (NSE) recently announced a new index for REITs and InvITs investments. The index comprises 6 entities – 3 REITs and 3 InvITs.
The index tracks the returns from July 2019. And the total return from the index since July 2019 is CAGR 10.48%. During this same period, Nifty 50 gave a return of 12.06%. (Source)
In this return of 10.48%, the price appreciation return was just 0.2%. Most returns were from the dividends distributed from REITs and InvITs.
We know the index doesn’t show the performance of individual REITs and InvITs. And we should also remember that not all REITs and InvITs will perform and give the same returns.
We have gone through many individual pieces of research on the performance of individual REITs and InvITs. And we can say that REITs and InvITs provide an average return of 7 to 10%.
So, the overall performance of REITs and InvITs has been good. Now let’s discuss a few essential points to consider before investing in them.
Important points to consider before investing in REITs and InvITs
1. Diversification of portfolio
Investing in REITs and InvITs allows us to diversify our portfolios. Diversification is necessary to reduce risk and volatility in our portfolio.
REITs and InvITs invest in various assets, such as commercial real estate, industrial properties, power transmission lines, and gas pipelines, which help to spread the risk across multiple assets.
2. Regular income
REITs and InvITs offer us a stable income stream through dividends. And sometimes, the dividend yield has been higher than other fixed-income instruments.
But again, these returns are not guaranteed. The market, interest rate, and regulatory conditions can affect returns.
3. Asset specific risk
Remember Covid lockdown?
A lockdown kind of situation is not good for both REITs and InvITs. This is just an example. REITs and InvITs investments are subject to risks such as natural disasters, accidents, changes in government policies, etc.
Also, some REITs have high exposure to some cities and clients in India. The same goes for InvITs. Some receive a major share of income from 1 or 2 projects.
This shows REITs and InvITs are not free of risk. If you are investing in any single REIT and InvITs, do a proper analysis as the risk would be high.
Should you invest in REITs and InvITs?
Investing in REITs and InvITs can offer you better asset allocation with low capital requirements. It can provide you with a good regular income through dividends.
But both are relatively new investment options in India. There are risks associated with investing in them, and you should carefully consider these risks before investing and set your expectations right.
Remember, “Risk comes from not knowing what you’re doing – Warren Buffett”.
As an investor, do your own research on each available REIT and InvIT, find out whether they are suitable for you based on your risk appetite or financial goals, and then decide whether to invest in them.
Our suggestion – invest in multiple REITs and InvITs to diversify and reduce your risk. Or wait for mutual fund houses to launch an index where you can invest.
Also, let’s say after your research, you don’t want to invest in REITs and InvITs directly, but you still want to get exposure to them. Then you can invest in mutual funds that invest a little in REITs & InvITs. Generally, this is 10-15%, but still, something is better than nothing.
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If you are like us, 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.
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.