By Jignesh Shah
Infrastructure investment trusts (InvITs) are required by law to distribute 90% of their cash flows to investors, making them ideal for income-seeking individuals. These cash flows are generally backed by stable infrastructure assets with long-term contracts, thereby providing extra comfort to the investors.
They 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.
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Diversification
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 & 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 the regulator, which mandates transparency in financial reporting, disclosures, and governance. This ensures that investors have greater visibility of their investments.
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.
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