By Jignesh Shah

Infrastructure investment trusts (InvITs) are required by law to distribute 90% of their cash flows to investors, making them ideal for income seekers. These cash flows are typically backed by stable infrastructure assets with long-term contracts, providing additional comfort to investors.

They also offer the potential for capital appreciation. If the underlying assets perform well or if InvITs expands its portfolio with new projects, the value of the units may increase over time. As IndiaIf the country’s infrastructure sector grows, the demand for quality assets is expected to increase, which could lead to higher InvIT valuations in the long term.

Diversification

InvITs offer a way to diversify a portfolio beyond traditional asset classes like stocks, fixed income and gold. Since InvIT returns are often linked to cash flows generated by real infrastructure projects, they have a “low correlation” with sotck exchange movements. Including InvIT in a portfolio can serve as a hedge against market volatility, providing stability during an economic downturn. In addition, invest different types of InvIT (such as those in roads, energy or telecommunications) can further diversify risks across sectors.

Liquidity and transparency

Unlike traditional infrastructure investments, which are often illiquid, publicly traded InvITs offer liquidity because they are traded on an exchange. Investors can buy or sell shares on a stock exchange, just like stocks. This makes InvITs more accessible and manageable than holding direct stakes in infrastructure projects, which can require significant capital and come with liquidity restrictions. Additionally, InvITs are subject to regulatory oversight by the regulator, which mandates transparency in financial reporting, disclosure and governance. This guarantees investors greater visibility over their investments.

Tax efficiency

InvITs offer some tax advantages that make them even more attractive than other related instruments. The income distributed by InvIT is generally a mixture of dividends, interest and capital gains, and the taxation of these elements can be more favorable than traditional income sources. For example, dividends from InvITs are often tax-free in the hands of the investor, provided certain conditions are met, while capital gains are subject to long-term tax rates if they are detained for more than a year. The tax-efficient nature of InvITs payments improves after-tax returns for investors, making them more beneficial in the long term.

Infrastructure Growth

The government has placed infrastructure development at the forefront of its economic agenda, with significant investments planned in roads, railways, energy and telecommunications. By investing in InvITs, investors gain direct exposure to these critical growth sectors, benefiting from the long-term development of the country’s infrastructure. Additionally, InvITs allow retail investors (with a small ticket size) to participate in large-scale infrastructure projects that would otherwise only be accessible to institutional investors or large corporations.

A smart addition to your portfolio

InvITs are becoming an increasingly important part of the investment landscape for individuals and institutions seeking regular income, portfolio diversification, longer-term assets and exposure to the growing infrastructure sector. Their ability to generate returns, coupled with liquidity, tax efficiency and growth potential, makes them an attractive addition to conservative and growth-oriented portfolios. With government policies favoring infrastructure expansion and a strict regulatory framework ensuring transparency, InvITs can play a pivotal role in improving your portfolio performance.

The author is partner and infrastructure manager, Alpha Alternatives.

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