Had you invested in the IPO of INVITS, How much return would you have earned?
| INVIT FUND | IPO Date | Issue Price | Cumulative Distribution | Price as of (31-03-2024) | Annualized return |
| IRB INVIT FUND | May-17 | 100 | 66.4 | 68 | 4.30% |
| INDIGRID | May-17 | 100 | 87.4 | 133 | 15% |
| POWER GRID INVIT TRUST | May-21 | 100 | 34.5 | 93 | 9% |
WHAT ARE INVITS
An infrastructure investment trust, also known as an InvIT, is similar to a mutual fund in that it is a pooled investment vehicle. However, while mutual funds invest in financial securities, an InvIT invests in real infrastructure assets such as roads, power plants, transmission lines, pipelines, mobile towers, renewable energy projects, data centers, and digital fiber infrastructure. These long-term infrastructure assets generate steady cash flows such as
- Toll from road projects
- Rent from mobile towers, or
- Fees for power transmission, etc.
After deducting expenses, the remaining income from these assets forms the Net Distributable Cash Flows. The NDCF is further used for declaring DPUs which are then distributed to the unitholders periodically.
As SEBI requires InvITs to distribute a minimum of 90% of their net distributable cash flows to investors. This results in high distribution per unit (DPU) or, simply put, dividends.
InvITs are a hybrid instrument between equity and debt investment, i.e., they have equity and debt features. InvITs like Indigrid are offering regular passive income in the form of quarterly distributions and scope for capital appreciation making them good investment products for consideration.
Investing in InvIT stocks typically offers an annualized return of 8-10%. Such pre-tax returns are generally not available in the debt markets, even when considering lower-rated segments like AA or AA-.
Dividend Per Unit By Top 3 INVIT Fund
Dividends are typically distributed as either interest or dividends.
| DPU (IN RS) | FY18 | FY19 | FY20 | FY21 | FY22 | FY23 | FY24 |
| IRB INVIT FUND | 10.6 | 12.3 | 10 | 8.5 | 9 | 8 | 8 |
| Powergrid InVIT | 10.5 | 12 | 12 | ||||
| INDIGRID | 11 | 12 | 12 | 12.2 | 12.75 | 13.35 | 14.1 |
Three reasons why investors should consider InvITs as an asset class.
- Predictable cash flows: As per SEBI, InvITs must invest at least 80% of their assets in completed & revenue-generating projects. An InvIT should not invest more than 10% in under-construction projects. This ensures predictable cash flows & maintaining healthy financials.
- High DPU: SEBI requires InvITs to distribute a minimum of 90% of their net distributable cash flows to investors. This results in high distribution per unit (DPU) or, simply put, dividends.
- Blend of Debt & Equity: The regularity of payments gives it a touch of a debt instrument. At the same time, the unit-holder participates in the company’s growth trajectory much like an Equity investor. The growth comes from capital gains, increasing DPU & new asset acquisitions.
Should you invest in InvITs
2 of the 3 listed InvITs have given good returns to investors. They declare regular DPUs, thus giving quarterly cash flows to investors, which can be a good source of passive income. They have also given decent capital appreciation to investors. The Dividend Yield of IRB Invit has been in the range of 11% – 20%.
| IRB INVIT FUND | FY18 | FY19 | FY20 | FY21 | FY22 | FY23 | FY24 |
| YIELD | 11.50% | 16.40% | 17.60% | 20.80% | 16.10% | 13.40% | 11.40% |
Diversification of portfolio: In the current scenario where interest rates for secure investments like fixed deposits are at a lower end, investors are looking to explore alternative investment options for better returns and capital appreciation without assuming high risk also InvITs perform well in low interest rate scenarios.
Risk-adjusted returns: InvITs can be suitable to hedge one’s portfolio against volatility in the markets. This is also underscored by the beta (risk premium) of InvITs which is much lower than other equity products. Thus, while calculating returns from InvITs, one must also look at the risk-adjusted returns (and not just absolute returns) as InvITs tend to generate better returns for lower risk. Generally higher Sharpe and Treynor ratios than most other pooled funds
BETA OF INDIGRID INVIT COMPARED WITH OTHER INSTRUMENTS
Efficient tax structure: InvITs benefit from a concessional long-term capital gains tax rate, similar to equities, when units are held for over three years and sold through stock exchanges. Additionally, InvITs may offer tax advantages, as some have a higher non-taxable portion of their Net Distributable Cash Flow (NDCF), depending on the tax regime chosen by the InvIT. Unit-holders are taxed at the same rate as the InvIT itself.
CONCLUSION
InvITs offer a compelling investment opportunity for those seeking stable income with potential capital growth. However, the opportunity size in InvITs is relatively small, with only a limited number of InvITs currently listed, and not all have delivered compelling returns. Therefore, it is crucial for investors to carefully evaluate certain key factors when selecting an InvIT:
- Superior Asset Profile
- Predictable and Stable Cash Flows
- Higher Dividend Yield
- Longer Average Tenure of Assets/Concession Period
- Robust Asset Pipeline
- Strong Sponsors
- Lower Loan-to-Value Ratio
InvITs that excel in these areas are likely to command a premium over others, offering better risk-adjusted returns and greater investment security.
Investors may consider allocating a small portion of their overall investment portfolio to InvITs. A systematic approach, such as accumulating units monthly, similar to a SIP, can help optimize returns and manage risk effectively
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