Infrastructure Investment Trust (InvITs): All you need to know
Created on 28 Apr 2021
Wraps up in 4 Min
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Updated on 01 Aug 2022
The pandemic is back. And that too, much more powerful than before. It has caused a crisis in the metro cities. But this could have been avoided. Only if the government had focused more on infrastructure. Now you know how essential it is to do so?
Here's a fun fact: You don't have to rely on the government for the same. You can invest in infra on your own and contribute to the development of the nation. One way to do so is by investing in InvITs.
Want to know more about them? Read the article below.
What are InvITs?
In simple words, Infrastructure Investment Trust (InvITs) is the mutual fund that invests in infrastructure. Or, you can consider them as an extension of Real Estate Investment Trusts (REITs). They invest the pooled money in infrastructure projects. The returns are distributed to investors through dividends.
InvITs are classified into two types: The first type invests in revenue-generating finished projects. They can go for a public offer. The second type invests in projects under construction, i.e., before they start generating revenue. They go for private placement. After all, the majority of us wouldn't invest in a company with a long gestation period, right?
You might be wondering why InvITs were introduced when people were already investing in infra companies? Remember one thing: InvITs finances the infrastructure projects through equity. It helps the infra companies to repay their debt obligation without much trouble.
How do InvITs work?
Generally, they comprise of following elements:
- Trustees: They are required to invest at least 80% in infrastructure assets. If they play such a crucial role, it is only natural that they have to register with SEBI as debenture trustees.
- Sponsor: Typically, they are the big players, with a net worth of at least Rs 100 Crores. They should hold at least 15% of the total shares in an InvIT, with a lock-in period of three years. They serve as a Special Purpose Vehicle (SPV).
- Investment Manager: As the name suggests, they manage the investments and the operations of the company.
- Project Manager: All of the above relate to the investments of the entire company. But a company undertakes many projects. Don't you think that there should be a person to execute the projects? Well, you guessed it right. The project manager executes the projects which the company undertakes. They also supervise ancillary responsibilities.
Who should invest in InvITs?
Like other stocks, InvITs are listed on a stock exchange. However, if you are planning to invest in an IPO of an InvIT, you may drop the idea unless you are a high net-worth individual.
Don't get us wrong! We don't mean to discourage you. But remember that the minimum investment required is Rs 1 Lakh. Pretty massive for a single investment. What's more, the minimum limit was Rs 10 Lakh before 2019!
If you can manage to afford this investment, you may go for it.
Why Invest in InvITs?
If they require such a substantial investment, you may wonder why people would invest in them in the first place? Don't worry. Here are some benefits of investing in InvITs:
- Diversification: They offer an opportunity to investors to diversify their portfolio. It helps to generate steady returns at less risk.
- Fixed Income: Like REITs, they distribute the majority of the profits through dividends. It becomes a good source of earning passive income, especially for old age.
- Liquidity: InvITs are listed on a stock exchange. That is why one of the best advantages they offer is the liquidity of the investment.
- Quality Asset Management: Previously, you understood that it is a type of mutual fund. So, investors get the benefit of professional management. It ensures effective allocation of investments.
Besides investors, promoters also derive benefits. They can reduce their debt by issuing equity. Also, the returns can be reinvested in other infra projects to avail the power of compounding.
Disadvantages of InvITs
If they had only benefits, everyone would invest in them. But it is not the case. They have the following drawbacks, due to which investors may avoid investing in them:
- Inflation Risk: You would know that massive investment is required to undertake infra projects. The inevitable evil called inflation may increase the operating cost. In that case, the profit margins will reduce. Hence, the net returns will also be lesser.
- Regulatory Risk: The infra companies have to comply with various laws like the Companies Act, Income Tax Act, and many more. Even a slight change in these laws may have an enormous impact on these companies.
- Asset Risk: As mentioned above, there is a long gestation period. So, you will have to be patient if you want to get attractive returns. But this delay may affect the predictions you made while investing.
The primary requirement while investing is analysing the growth prospects of the investment. So, you must know the growth prospects of InvITs.
Don't worry. InvITs have a bright future ahead. Firstly, they would reduce the burden of debt among the infra companies. It will encourage developers to invest in infrastructure, as the capital requirement will be lesser.
Also, it will make the acquisition of capital cost-effective. So, InvITs can generate better returns. By seeing the development of the infra sector, why would the foreign investors stay back? They, too, will invest, leading to an inflow of foreign exchange and GDP growth.
Considering the attractiveness of investment, retail investors will also invest in diversifying their portfolio. All of this would lead to economic development.
InvITs are a good investment tool to diversify your portfolio and earn decent returns at low risk. But they require heavy investment. So, they may not be affordable for retail investors. If you can invest, don't hesitate to invest in an InvIT, as it has good growth potential. However, check that it aligns with your investment objectives and financial goals.
In the end, remember that infrastructure is the backbone of an economy. So, invest in infrastructure and witness India reach that 5-trillion mark!
Anyway, what's your version of InvITs? Let us know in the comments below
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