Infrastructure Funding Trusts or InvITS are increasingly popular these days,, especially amongst wealthy investors who want to invest beyond low yield conventional debt devices. High net worth individuals or HNIs are seeking the InvITs as a better option to invest as the Powergrid InvITs recently completed its IPO of around 7800 Crore.
Similarly, they encourage affluent investors to purchase these InvITs, which could return 8-10%, on an annual basis.
InvITs are recently launched instruments that allow companies to monetize real based infrastructure assets such as roads, bridges and power grids. The best part for the investors is that they can receive the returns generated from the assets without putting money in the units.
What are InvITs
InvITs and infrastructure investment trusts are investment instruments that are like mutual funds at the same time, they are regulated under SEBI. Unlike regular mutual funds, their units are listed on the stock exchange. And hence they are treated like stocks.
INVITs are a combination of both equity and debt instruments.
INVITs are launched with the aim of promoting the infrastructure of India by encouraging many young investors to invest in it and achieve attractive returns from it.
INVITs are specially designed to gather money from different investors who are invested in major income-generating assets.
The revenue generated from the infrastructure projects is distributed among the investors through dividends.
Types of INVITs
InvITs gives individuals a way to park their funds in infrastructure project by two ways:
Investment in Revenue Generating Finished Projects
This allows individuals to invest in revenue-generating finished projects through a public offering.
Investment in Projects That Come Under Construment
Investors also invest in projects that are either under construction or have been finished.
Before getting more into INVITs, let's understand the scope of infrastructure Investment Trusts
INVITs are new instruments that give companies the right to monetize their infrastructure asset and monetise the revenue. By doing this, InvITs offer their investors a reliable and steady source of income through infrastructure assets with different risks associated.
Also, a major part of cash flow is allocated in the form of tax-free dividends, which makes it more attractive to would-be investors.
Here are the returns generated by the publicly listed investment infrastructure trust:
- India Grid Trust: The returns generated and distributed to the shareholders by India Grid is 56%.
- IRB INVIT: The returns generated and distributed to the shareholders by IRB InvIT is around 83%.
- PowerGrid INVIT: The power grid INVIT was recently listed in May 2021, and surprisingly it has generated and distributed over 20 percent so far.
Right Now, There are 6 Additional InvITs That are Privately Listed
Power transmission infrastructure investment trusts are considered one of the most popular investors knowing the fact that they offer a pre-tax return between 8 to 9.3 percent. Even these types of pre-tax returns are not available in the debt market even when the risk of AA /AA -segments is considered.
Hence, investors eagerly wait for these types of funds as these assets provide more liquidity like stocks. The thing is these assets are traded in the same way the stocks are.
Structure of InvITs in India
Infrastructure investment trust SEBI consists of four elements:
Trustee
The trustee should be registered with SEBI as a debenture trustee. In addition to this, a trustee has to invest at least 80% into assets of infrastructure that generate a steady profit.
Sponsor
To be a sponsor, a promoter, or a company with a net worth of Rs 100 Crore is required. Also, they are required to hold at least 15% of total InvITs investment with a minimum lock-in period of 3 years. In the case of public-private partnerships or PPP, sponsors serve as a Special Purpose Vehicle (SPV).
Project Manager
The authority’s main work is executing projects. In the case of PPP projects, it serves as an entity that supervises ancillary responsibilities.
Investment Manager
Investment managers monitor all the operational activities of INVITs.
Purpose of INVITs?
The sole purpose of INVITs is to allow infrastructure companies to repay their debt obligations effectively. This is because such types of projects take time to generate substantial cash flow, INVITs come in handy for paying off loan interest and other expenses easily.
Advantages of InvITs
Although InvIT is considered one of the most expensive investments, it comes with several benefits too.
Here are the benefits provided by infrastructure trusts:
Diversification
InvITS enable investors opportunity to diversify their investment portfolios. Since InvITs come with multiple assets, the overall risk is minimized.
Accrues Fixed Income
Minimize risk and excellent diversification provide shareholders with a fixed income, especially for retirees. Also, investment tools would help those people whose retirements will be coming soon.
Liquidity
Infrastructure investment trusts allow investors to get easy enter/exit from the fund, which in turn improves their liquidity aspect.
Investors
It is good news for investors that parking funds into the InvITs help them to generate a steady yet fixed return. For instance, an infrastructure investment trust has distributed 90% of its total cash flow to its investors. Investors also receive a dividend income on their investments.
Promoters
Investing in InvITs allow promoters to minimize their debt burden through an asset sale. In addition to this, promoters can use the debt amount in reinvesting other projects.
Do INVITs Carry Any Sort of Risk?
Though INVIT looks like a bond in the form of an equity structure, the returns generated from them are not as good as the returns generated from FDs.
Operational and Credit Risks
Since the majority of the infrastructure projects are underlying; they could face operational and credit risk which in turn could impact the ability of the INVIT to generate steady cash flows.
Risks Related to Future Capital Raising
A lot of risks are associated with capital raising and acquiring new assets to sustain cash flow for a long time. These risks will not only affect the overall surplus but also capital value. The quality of new assets added to an InvITs heavily impacts its stock price and cash flow.
Who Should Invest in INVITs?
INVITs are quite similar to stocks and therefore they are also listed on the stock exchange through IPO. The minimum amount required to invest in INVITs is Rs 10 Lakh. Notably, small investors find it hard to invest directly into InvITs through IPO. Regardless, HNIs and other high profile investors consider it as a good opportunity to invest because of its return prospects.
Should You Invest in InvITs?
As said earlier, InvITs are a good option to manage wealth to an upper wealth as it generates a steady term income. In reality, you need to make sure that the fund gives a return in the long run. Also, you can't neglect the risk associated with the underlying assets.
Takeaway
INVITs are a good option to invest only if investors are willing to spare a minimum of three years on the same. Investors should know that INVITs are often associated with short term price fluctuations as the variations are always there in the interest rates.
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