The economic development of any nation relies on infrastructure; India is no exception. With rapid urbanization and industrial expansion, growing demand is leading to astonishing improvements in infrastructure. This has given rise to a new range of financial products such as Infrastructure Investment Trusts-InvIT, which enable institutional and personal investors to directly help the country’s infrastructure grow.

This article will explain in detail what InvITs are, their structure and how they are different from REITs (Real Estate Investment Trust), the advantages and disadvantages of Invite investments. In conclusion, you will have a reasonable understanding of infrastructure investment. Trust operations and a worthy investment route is worth considering.

What are InvITs?

It is an investment vehicle or instrument pooling money from various investors into infrastructure projects. Essentially, it invests the money collected in stocks or bonds, much like mutual funds. The full form of InvIT is “Infrastructure Investment Trust”. Therefore, these trusts appear to be designed in such a way as to channel investments into income-generating assets such as roads, bridges, power plants and telecommunications networks. In fact, it would be an excellent opportunity to create stable and sustainable income for investors and, simultaneously, support essential infrastructure projects normally developed with resources from the state budget.

Although it is a new category of investment in India, the introduction of InvITs regulations by SEBI in 2014 paved the way for investment. It thus allows InvITs to raise funds from investors to use them in the development of an infrastructure project. Therefore, the income generated from such projects is paid out as dividends to investors, thereby providing a steady stream of income.

Structure of InvITs

The architecture of infrastructure investment trusts resembles that of mutual funds with four components: –

1. Sponsor:

The minimum net worth of a sponsor should be Rs 100 crore. A sponsor will be required to retain a minimum of one quarter of the InvIT units for at least three years.

2. Trustee:

This ensures that the InvIT works in the best interest of investors and functions as a tool for monitoring project performance. The trustee must be separate from the sponsor. There cannot be a direct financial interest in the trust.

3. Investment manager:

The company responsible for managing InvIT’s assets and investments is the investment manager. Making important decisions about which infrastructure projects to invest in and determining how to achieve the best returns for investors is the responsibility of the investment manager.

4. Project manager:

The Project Manager oversees the construction, operation and maintenance of the infrastructure assets that InvIT will finance.

How InvITs Differ from REITs

Although the structure and governance are similar, InvITs differ from REITs in their application across different sectors. Although REITs typically invest in real estate assets such as commercial properties, shopping malls and residential complexes, InvITs would only deal with infrastructure projects.

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

Asset class:

While InvITs invest in infrastructure projects such as roads, highways and power plants, REITs invest in real estate properties that generate income.

Investment horizon:

Generally, the investment horizon of InvITs is much longer than that of REITs. This is because the infrastructure project takes a few years to generate profits.

Liquidity:

The general belief is that REITs are more liquid due to their lower unit prices and therefore may be more affordable for small investors. Usually, InvITs require a higher initial investment and are therefore less affordable for retail investors.

Risk profile:

Infrastructure projects are truly the first victims of regulatory and operational risks. Therefore, InvITs are believed to have a high risk profile compared to REITs.

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

Benefits of InvITs investment

1. Regular income:

The regular income that investing in InVIT brings is one of its biggest advantages. According to regulations, at least 90% of net distributable cash flow must be distributed to investors in the form of dividends. They are therefore a great option for those looking for income.

2. Diversifications:

Infrastructure investment trusts allow you to diversify a portfolio. Typically, the performance of conventional equity and fixed income asset classes is not correlated with the performance of infrastructure assets. This provides some protection against market volatility.

3. Professional management:

Like mutual funds, InvITs are managed by professional investment managers with extensive experience overseeing large infrastructure projects. This ensures the best returns and efficient use of money.

4. Tax advantages:

Dividend income from InvITs is now taxable according to the investor’s tax scale, following amendments to the Finance Act 2020. However, interest and rental income from InvITs remains tax-exempt. Previously, dividend income was tax free, but this benefit no longer applies.

5. Long-term development:

Infrastructure projects of any country form the backbone of its development in which an investor engages in long-term growth opportunities through InvIT investment.

Risks associated with investing InvITs

All this investment in InvIT comes with many risks:

1.Regulatory risk:

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

2. Inflationary risk:

Most infrastructure projects have a long gestation period, and when inflation is high, operating costs increase, reducing profitability.

3. Asset risk:

The large capital-intensive projects that InvIT invests in typically take several years to come online and, therefore, delays or underperformance of these projects will result in lower returns.

4. Liquidity:

Investing in InvITs is relatively less liquid compared to the main conventional investment avenues such as stocks or bonds. This is especially true for small investors, as the minimum investment amount in InvITs is quite high.

Outlook for InvITs in India

The future of infrastructure investment trusts looks bright for India. With the government’s focus on infrastructure and the introduction of policies encouraging private sector participation, the demand for InvIT as an investment instrument would increase.

Moreover, with more and more infrastructure projects coming online, InvIT would ensure a steady flow of income to investors besides meeting the demand for infrastructure in the country.

One such area is participation in public-private partnership agreements, in which the financial burden can be eased from the government by inviting private investors to participate in projects. The added benefit of InvIT investment in such critical infrastructure projects is that their timely completion is assured.

Conclusion

Aside from their risks, the obvious benefits of diversification, consistent income and expert management will make investing in InvITs attractive to long-term investors. With an additional way to generate consistent revenue, this is a great way to help India’s infrastructure sector thrive.

The key difference in understanding InvIT and REIT is fundamentally essential for making informed investment decisions. Whether you are a high net worth individual investor or an institutional investor, InvITs offer a way to expose yourself to one of the most essential elements of the economy.

InvIT therefore occupies an increasingly important place in the financing of infrastructure projects and is expected to maintain this position. Infrastructure investment trusts provide an ideal investment route for investors seeking stable returns and long-term growth.