
Why InvITs should be part of your investment portfolio
Authored by Jignesh Shah, Partner and Head Infrastructure, Alpha Alternatives
Monday May 2024
In recent years, Infrastructure Investment Trusts (InvITs) have gained prominence as a viable investment option for investors. InvITs are hybrid instruments that combine the benefits of equity and debt by pooling investors’ capital to invest in infrastructure assets, such as highways, power transmission lines, renewable energy projects, and telecom towers. With infrastructure being a critical engine for long-term economic growth, InvITs provide a unique way for investors to tap into these projects while enjoying regular income and capital appreciation.
Let’s understand in detail on why InvITs should be a part of a diversified portfolio and how it can benefit investors across risk profiles: –
- Regular Yields and Capital Appreciation: InvITs are required by law to distribute 90% of their cash flows to investors, making them ideal for income-seeking individuals. Apart from this, these cash flows are generally backed by stable infrastructure assets with long-term contracts, thereby providing extra comfort to the investors.
In addition to generating regular income, InvITs also offer capital appreciation potential. If the underlying assets perform well, or the InvITs expands its portfolio with new projects, the value of the units can increase over time. As India’s infrastructure sector grows, the demand for quality assets is expected to rise, which could drive upward valuations for InvITs in the long run.
- Diversification across Asset Classes: InvITs provide a way to diversify a portfolio beyond traditional asset classes like equities, fixed income, and gold. Since the returns from InvITs are often linked to the cash flow generated by real infrastructure projects, they have ‘low correlation’ with stock market movements. Including InvITs in a portfolio can act as a hedge against market volatility, offering stability during economic downturns. Additionally, investing in different types of InvITs (such as those in roads, energy, or telecom) can further diversify risk across sectors.
- Liquidity and Transparency: Unlike traditional infrastructure investments, which are often illiquid, publicly listed InvITs offer liquidity as they are traded on stock exchanges. Investors can buy or sell units on the exchange, just like stocks. This makes InvITs more accessible and manageable than holding direct stakes in infrastructure projects, which may require substantial capital and come with restrictions on liquidity. Additionally, InvITs are subject to regulatory oversight by regulator, which mandates transparency in financial reporting, disclosures, and governance. This ensures that investors have greater visibility of their investments.
- Exposure to India’s Infrastructure Growth: The Indian government has placed infrastructure development at the forefront of its economic agenda, with significant investments planned in roads, railways, energy, and telecom. By investing in InvITs, investors gain direct exposure to these critical growth sectors, benefiting from the long-term development of the country’s infrastructure. Moreover, InvITs allow retail investors (with small ticket size) to participate in large-scale infrastructure projects that would otherwise be accessible only to institutional investors or large corporates.
- Tax Efficiency: InvITs offer certain tax advantages that make them even more attractive than other related instruments. The income distributed by InvITs is generally a mix of dividend, interest, and capital gains, and the taxation of these components can be more favourable than traditional income sources. For instance, dividends from InvITs are often tax-exempt in the hands of the investor, provided certain conditions are met, while capital gains are subject to long term tax rates if held for more than one year. The tax-efficient nature of InvITs payouts enhances the post-tax returns for investors, making them more beneficial over the long term.
Conclusion: A Smart Addition to Your Portfolio: InvITs are becoming an increasingly important part of the investment landscape for both individuals and institutions looking for regular income, portfolio diversification, longer term assets and exposure to the growing infrastructure sector. Their ability to generate yields, coupled with liquidity, tax efficiency, and potential for growth, makes them a compelling addition to both conservative and growth-oriented portfolios. With government policies favouring infrastructure expansion and stringent regulatory framework ensuring transparency, InvITs can play a pivotal role in enhancing your portfolio’s performance.
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