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HomeInvestmentInvITs: Is It A Good Investment Option For Retail Investors?

InvITs: Is It A Good Investment Option For Retail Investors?

Infrastructure Investment Trusts (InvITs) have gained prominence as exchange-traded investments offering partial ownership in infrastructure projects. Governed by SEBI regulations, InvITs are managed by professionals, relieving investors of project management responsibilities. This article provides a comprehensive overview of InvITs, exploring their formation, types, returns, taxation rules, and whether they are a viable investment choice for retail investors.

What is an Infrastructure Investment Trust (InvIT)?

InvITs are developer-sponsored trusts that own, operate, and invest in completed and under-construction infrastructure projects. These projects encompass various sectors, including roads, power distribution networks, telecom towers, and more. The primary objective of InvITs is to attract investment in the Indian infrastructure sector for overall economic growth, providing investors with a consistent income stream through dividends.

Read: What Are Corporate Actions in Share Market

Characteristics  Details 
Purpose Ownership and Investment in Infrastructure
Structure Trust Structure
Income Sources Dividends, Interest, Capital Gains
Governance SEBI Regulations

How is an InvIT Formed?

InvITs typically follow a multi-step formation process:

  1. Sponsorship: Infrastructure Development Companies become sponsors, appointing a Trustee.
  2. Trust Formation: The sponsor establishes an InvIT, often in the form of a Special Purpose Vehicle (SPV), registering it under the Indian Trusts Act, of 1882.
  3. Asset Control: The Trustee assumes control of income-generating infrastructure assets, separating them from the sponsor’s direct control.
  4. Managerial Appointments: Investment and project managers are appointed to oversee optimal returns and infrastructure project management.
  5. Listing: InvITs can choose to list on stock exchanges, allowing public trading of units, or remain privately held.

Types of InvITs and Their Rules in India

InvITs in India can be categorized based on the types of infrastructure they own or operate, including energy, transport & logistics, communications, social and commercial infrastructure, and water and sanitation. From a funding perspective, they can be privately held or publicly listed.

Type  Description 
Energy Power generation and distribution
Transport & Logistics Operating highways and toll roads
Communications Optical fiber networks and telecom towers
Social and Commercial Parks
Water and Sanitation Irrigation networks

Performance Metrics and Financial Indicators

S.No.  Name  CMP (Rs)  Mar Cap (Rs crore) ROE %  ROA 12M %  ROIC %  ROCE %  Debt / Eq  Int Coverage  Dividend Prev Ann (Rs crore) 
1 India Grid Trust 129.1 10,117.22 8.78 2.34 7.83 7.71 2.93 1.36 840.27
2 Powergrid Infra. 95.58 8,697.77 -3.24 -3.04 -76.53 -2.56 0.07 21.14 955.50
3 National High 118.5 8,607.90 3.82 2.85 3.74 4.3 0.41 2.01 0.00
4 India Infra Trust 90 5,976.00 17.88 3.41 8.55 8.3 2.42 1.89 0.00
5 IRB InvIT Fund 70.5 4,092.53 8.78 2.92 5.09 8.48 0.76 2.51 4,592.34

Investment Considerations: Benefits and Limitations

Benefits  Limitations 
Diversification Unpredictable Cash Flows
Regular Income Taxable Dividend and Interest Income
Professional Management Limited Investment Choices
Capital Gains Low Liquidity

Taxation Rules of InvITs

Investors in InvITs should be aware of the tax implications:

  1. Tax on Dividend and Interest Income: Taxable as per the investor’s slab rate, potentially up to 30% for the highest income tax slab.
  2. Tax on Capital Gains: Short-term gains taxed at 15%, applicable if units are sold within 3 years; long-term gains taxed at 10% for gains exceeding Rs. 1 lakh.

Who Should Invest in InvITs?

InvITs are suitable for investors with the following objectives or characteristics:

  1. Regular Income Seekers: Ideal for those seeking a steady income stream through dividends or interest.
  2. Risk-Averse Investors: Relatively less risky than other market-linked investments, making them favorable for risk-averse investors.
  3. Diversification Seekers: A good option for diversifying investment portfolios with exposure to a unique asset class.

Conclusion

InvITs present an intriguing investment avenue for retail investors, offering diversification, regular income, and professional management. The suitability of InvITs depends on your circumstances and investment goals. If you are a risk-averse investor seeking regular income and portfolio diversification, InvITs can be a good option. However, if you prioritise liquidity or are uncomfortable with unpredictable cash flows, other investment avenues might be better suited. Carefully assess your risk tolerance, investment horizon, and financial goals before making a decision. However, investors should be mindful of unpredictable cash flows, taxable dividend and interest income, limited investment choices, and low liquidity.

Thorough consideration of personal financial goals, risk tolerance, and taxation implications is crucial before venturing into InvIT investments. As with any financial decision, consulting with a financial advisor can provide valuable insights tailored to individual circumstances. InvITs, with their unique structure, contribute to the evolving landscape of investment opportunities in the Indian market.

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