For retail investors, to manage their investment portfolio volatility due to both macro and micro level factors such as inflation, geo-political crisis, stock market fluctuations, etc., financial experts advice that InvIT’s and Reits could be a good choice for portfolio diversification.
Both InvITs and Reits have lately received attention, with mutual fund companies seeking for a separate fund category for these investment vehicles. InvITs stand for ‘Infrastructure Investment Trusts’, and Reits stand for ‘Real Estate Investment Trusts’.
Despite having some exposure to these asset classes, hybrid and multi-asset mutual funds are becoming more and more recognized as stand-alone products. The importance of Reits and InvITs has expanded significantly over the years, with mutual funds now holding more than Rs. 18,000 crore in these instruments, a figure that has risen dramatically in recent years.
We will see bit more about InvITs in this blog-post.
InvITs were introduced in 2017, yet many investors are still unfamiliar with them. These new financial products are intended to raise funds by selling units to investors, which are subsequently invested in infrastructure assets. InvITs are an important source of financing those projects, allowing individuals to jointly participate in and profit from numerous infrastructure projects.
InvITs have varied asset portfolios, owning and managing finished or under-construction projects in a variety of essential industries. These assets might include roads, electricity transmission networks, telephone towers, fiber optic networks, and more. Particularly, there are 22 SEBI-registered InvITs in India, but just three of them are publicly traded and liquid.
How are InvITs structured?
The structure and purpose of invITs are similar to those of mutual funds. They pool contributions from a large number of individual and institutional investors, and these are then carefully allocated to infrastructure projects. Qualified fund managers monitor InvITs, much as they do in mutual funds, providing efficient administration and a possibly consistent income source for unit holders. These trusts provide an opportunity for investors to participate in India’s infrastructure building narrative while also benefiting from steady earnings and portfolio diversification.
To form an InvIT, up to three sponsors are required, each having a net worth of at least 100 crore and at least five years of expertise in the development of infrastructure or in fund management. Sponsors must have at least a 15% ownership in the InvIT. The investment manager in charge of asset operations should have a net worth of Rs. 10 crore and 5 years of advising of infrastructure development expertise. The trustee controls the assets for unitholders.
InvITs guarantee a consistent stream of cash flows due to SEBI regulation, which mandates the InvITs to allocate at least 80% of its assets to finished, income-producing projects and limits investments in under-construction projects to 10%. Furthermore, SEBI mandates InvITs a minimum distribution of 90% of its net distributable cash flows, resulting in a strong distribution per unit (DPU) and hence significant dividends for the investors.
InvITs have their own unique set of features. They provide the stability of debt-like payments while also allowing investors to take part in the company’s development story, possibly resulting in capital gains, increased DPU, and the purchase of additional assets. This harmonic combination of stability and development establishes InvITs as an investment option for portfolio diversification.
Challenges for InvITs:
Despite the aforementioned, InvITs provide several issues. As rates rise, interest payments on flexible-rate debt inside the InvIT may increase, resulting in greater expenditures and a potential fall in DPU. In addition, growing debt costs might result in higher refinancing costs when expiring debt requires replacement. Adequate interest rate risk management, such as diversification and hedging methods, is critical for InvITs to handle these issues while maintaining attractive returns for investors.
Also, as rates climb, competing fixed income products in the market become more appealing, reducing the attraction of InvITs. Delays in asset purchase relative to market estimates may also result in corrections or declines in InvITs.
Some of the key issues that InvITs currently face are:
- Inadequate asset acquisition;
- Higher loan costs and refinancing;
- Increased interest payments on current debt owing to variable rate debt;
- Overly optimistic revenue/toll estimates, leading to the development of other roadways.
