Understanding Infrastructure Investment Trusts (InvITs): A Comprehensive Guide

Last Updated: 28 Oct 2024

Any nation’s economic development is built on infrastructure; India is not an exception. With fast urbanization and industry expansion, increasing demand is driving amazing improvements in the infrastructure. This has brought in a fresh spectrum of financial products such as Infrastructure Investment Trusts-InvITs, which let both institutional and personal investors directly help the infrastructure of the country to expand.

This post will go into great length on what InvITs are, their structure, and how different they are from REIT (Real Estate Investment Trust), the advantages and drawbacks of Invite investments, By the conclusion, you will have a reasonable understanding of Infrastructure Investment Trust’s operations and a worthy path of investment worth considering.

What Are InvITs?

It is an investment vehicle or instrument pooling money from various investors into infrastructure projects. Essentially, it invests the collected money in stocks or bonds, much like mutual funds. The full form of InvIT is “Infrastructure Investment Trust.” Hence, these trusts turn out to be devised in a manner to channel investment into revenue-generating assets such as roads, bridges, power plants, and telecommunications networks. In fact, it would be an excellent opportunity to build long-lasting, stable income positions for investors and, concurrently, support essential infrastructure projects normally developed with resources from the state budget.

While it is a new class of investment in India, the introduction of InvITs regulations by SEBI in 2014 paved the way for investment. It thus enables InvITs to raise funds from investors to be utilized for developing an infrastructure project. Hence, income generated from such projects is disbursed as dividends to the investors, providing a regular stream of income.

Structure of InvITs

The architecture of the infrastructure investment trusts is like that of mutual funds with four components: –

1. Sponsor:

A sponsor’s minimum net worth should be Rs 100 crore. A sponsor will be required to keep at least three years’ worth of a minimum of one-fourth of the InvIT units.

2. Trustee:

This ensures the InvIT runs in the best interest of the investors and works as a monitoring tool over the performance of the project. The Trustee has to be apart from the Sponsor. Direct financial interest in the trust cannot exist for it.

3. Investment Manager:

The company in charge of handling the InvIT assets and investments is the Investment Manager. Making important decisions on which infrastructure projects to invest in and determining how to achieve the best returns for investors falls under the responsibility of the investment manager.

4. Project Manager:

The project manager supervises the building, running, and maintenance of infrastructure assets the InvIT will be funding.

How InvITs Differ from REITs

While the structure and governance are similar, InvITs vary from REITs in the formers’ application to different sectors. As much as REITs usually invest in real estate assets like commercial properties, shopping malls, and residential complexes, InvITs would deal purely with infrastructure projects.

Well, here are some basic differences between InvITs and REITs:

Asset Class:

While InvITs invest in infrastructure projects like roads, highways, and power plants, REITs invest in real estate properties that yield incomes.

Investment Horizon:

Generally, the investment horizon for InvITs is much longer compared to REITs. This is because the infrastructural project does take a couple of years to accrue benefits.

Liquidity:

The general belief is that REITs are more liquid because of lower pricing for their units and, therefore, can be more affordable for smaller investors. Usually, InvITs require a higher initial investment and hence are less affordable for retail investors.

Risk Profile:

The infrastructure projects are really at the receiving end of regulatory and operational risks. Hence, InvITs are believed to be carrying a high-risk profile compared to REITs.

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

Benefits of InvITs Investment

1. Regular Income:

The regular income that the investment in InVITs returns is one of the biggest advantages of the same. By regulation, at least 90% of net distributable cash flow has to be given out to investors as dividends. Hence, they are an excellent option for those seeking income.

2. Diversification:

Infrastructure Investment Trusts allow one to achieve diversification in a portfolio. Generally, the return of conventional asset classes of stock and fixed-income instruments goes forward uncorrelated with the return on infrastructure assets. This offers some protection against market volatility.

3. Professional Management:

Like mutual funds, the InvITs are run by professional investment managers with a great deal of experience overseeing big infrastructure projects. This ensures the best returns and effective use of money.

4. Tax Benefits:

Dividend income from InvITs is now taxable as per the investor’s tax slab, following the Finance Act 2020 changes. However, interest and rental income from InvITs remain tax-exempt. Earlier, dividend income was tax-free, but this benefit no longer applies.

5. Long-term Development:

Any nation’s infrastructure projects form the backbone of its development in which an investor engages in long-term growth possibilities by means of InvIT investment.

Risks Associated with InvITs Investment

All this investment in InvITs comes with a lot of risks:

1.Regulatory Risk:

A change in government policy or regulation can directly affect the project performance. For example, a revision in the toll rate may affect the revenue that is to be generated from road projects and, consequently, return to investors.

2. Inflation Risk:

Most of the infrastructure projects have a lengthy gestation period, and with high inflation, the cost of operation rises, hence shrinking profitability.

3. Asset Risk:

Large capital-intensive projects in which InvITs usually invest take several years to be commissioned and, thus, delays or underperformance in these projects will result in lower returns.

4. Liquidity:

The investment in InvITs is relatively less liquid compared to the main conventional avenues of investment such as stocks or bonds. This is true, particularly for small investors, since the minimum amount of investment in InvITs is pretty high.

Prospects of InvITs in India

The future of Infrastructure Investment Trusts looks bright for India. With the government’s emphasis on infrastructure and introducing policies that encourage private sector participation, demand for InvITs as an investment instrument would rise.

Further, with the commissioning of more and more infrastructure projects, InvITs would ensure a regular flow of income to the investors besides catering to the demand for infrastructure in the country.

One such area is the involvement in public-private partnership deals, where the financial burden can be offloaded from the government by inviting private investors into projects. The added advantage of an InvIT investment in such critical infrastructure projects is that their timely completion gets ensured.

Conclusion

Apart from their hazards, the clear advantages of diversification, consistent income, and expert management will make investing in InvITs appealing to long-term investors. With an additional means of consistent revenue, it is an excellent way for one to help India’s infrastructure industry flourish.

The key differentiation in understanding InvIT and REIT is basically essential to making informed investment decisions. Whether you are a high-net-worth individual investor or an institutional one, InvITs offer a means of getting exposure to one of the most vital constituents of the economy.

InvIT therefore increasingly occupies an important place in infrastructure project financing and is expected to maintain this position. Infrastructure Investment Trusts are a befitting investment avenue for investors who have an appetite for steady returns with long-term growth.

Frequently Asked Questions

What is InvIT's full form?

Infrastructure Investment Trust is the complete form of InvIT.

What is InvIT or Infrastructure Investment Trust?

Infrastructure Investment Trust is a kind of mutual fund wherein money pooled from a group of investors goes to income-generating infrastructure projects such as a highway, power plant, or telecom tower. Returns from those projects get distributed among the investors in the form of dividends.

How do InvITs work?

InvIT pools capital from investors to invest in infrastructure projects. It appoints a professional investment manager who manages the funds of InvIT, and the net income so derived is distributed to the investors. At least 90% of the net distributable cash flow of InvIT has to be distributed to unit holders, thereby making them an effective source for regular income.

How are InvITs different from REITs?

InvITs and REITs are similar in structure but differ in focus. While InvITs invest in infrastructure assets such as roads and power plants, REITs, on the other hand, invest in real estate assets like commercial buildings and malls. Generally, InvITs have a longer investment horizon and a higher risk owing to the nature of infrastructure projects.

Who can invest in InvITs?

Both institutional and retail investors can subscribe to InvITs. Still, generally, because of their high initial investment requirement, they fall mainly within the reach of HNIs and institutional investors. Certain InvITs are listed on stock exchanges, hence allowing smaller investors to get access and avail themselves of the opportunities provided.