Investment options: Can InvITs be a smart tool for long-term returns? Check details

Infrastructure investment trusts, like mutual funds, are overseen by the Securities and Exchange Board of India. These investment vehicles allow both individual and institutional investors to directly invest in infrastructure projects and receive a portion of the income in return.

Recently, the market regulator Sebi proposed allowing Real Estate Investment Trusts (REITs), Small and Medium REITs (SM REITs), and Infrastructure Investment Trusts (InvITs) to use interest rate derivatives for hedging risk. Additionally, Sebi has recommended approving locked-in units for REITs and InvITs to be transferred among sponsors and their groups, similar to rules for promoters in listed companies. This adjustment aims to assist sponsors in managing their holdings without compromising their "skin in the game."

Additionally, the Securities and Exchange Board of India (Sebi) has put forward recommendations to include fixed deposits as cash equivalents for leverage calculations for Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). Sebi also aims to provide clarity on credit rating requirements for borrowing by REITs and InvITs, establish a timeline for board vacancies to be filled, and broaden the asset base for REITs and Small and Medium REITs. 

Moreover, Sebi has suggested allowing REITs to invest in liquid mutual funds and proposed measures to streamline business operations for REITs and InvITs while ensuring investor protection. The consultation paper by Sebi is contemplating the possibility of REITs and InvITs utilizing derivatives such as interest rate swaps to hedge against interest rate fluctuations.

InvITs as investment tool

InvITs offer a means of diversifying a portfolio beyond traditional asset classes such as equities, fixed income, and gold. As the returns on InvITs are typically tied to cash flow from real infrastructure projects, they exhibit a minimal correlation with fluctuations in the stock market. Integrating InvITs into a portfolio can serve as a safeguard against market volatility, providing stability in times of economic downturn. Furthermore, allocating funds to various types of InvITs (e.g. those involving roads, energy, or telecom) can further spread risk across sectors.

The Narendra Modi-led government is prioritising infrastructure development as a key component of its economic strategy, with substantial investments earmarked for roads, railways, energy, and telecom. 

As per experts, investing in Infrastructure Investment Trusts (InvITs) provides investors with a direct stake in these vital sectors, allowing them to capitalize on the country's long-term infrastructure growth. 

Additionally, InvITs offer retail investors the opportunity to participate in major infrastructure projects typically only available to institutional investors or large corporations, with low entry barriers.

"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," Jignesh Shah, partner and head infrastructure, Alpha Alternatives, wrote in a column in a financial daily.  

Taxation bit

InvITs provide specific tax benefits that render them more appealing compared to other similar instruments. The income distributed by InvITs typically consists of a blend of dividends, interest, and capital gains, with tax treatment on these elements often being more advantageous than conventional income sources. For example, dividends from InvITs are frequently exempt from tax for investors, as long as specific criteria are satisfied, and capital gains are subject to long-term tax rates if held for over a year.