Your investment portfolio typically comprises instruments placed at different points on the risk-return spectrum. For instance, hybrid funds such as infrastructure investment trusts (InvITs) sit between equity (high risk–high return) and debt (low risk–low return).
InvITs are investment vehicles similar to mutual funds that pool money from investors to finance income-generating infrastructure projects such as roads, highways, telecom towers, warehousing, digital infrastructure, and power generation and transmission lines.
Regulated by Sebi, they provide regular income (dividends/interest) and capital appreciation, requiring 90% of net cash flows to be distributed to investors. NSE defines InvITs as a “collective investment scheme similar to a mutual fund, which enables direct investment of money from individual and institutional investors in infrastructure projects to earn a portion of the income as return”.
They help infrastructure developers monetize completed assets, reducing debt and freeing up capital for new projects. Comprising a sponsor, trustee, investment manager and project manager, they hold assets directly or through special purpose vehicles (SPVs).
As an example, National Highways Authority of India (NHAI) constructs multiple roads; one road would be an SPV for this purpose. The toll collections from the road would be routed to the InvIT that is holding multiple SPVs originated by NHAI. While there is no commitment or guarantee on the toll collections, there is visibility.
This visibility comes from historic data of traffic on that road, expected GDP growth, expected traffic growth, toll rates, etc.
Comparison with equity and debt
InvITs have certain aspects similar to equity and debt investments. The units are listed at the exchange (NSE/BSE) and prices are open to fluctuations. On this aspect, it is similar to equity.
However, equity is more volatile. In equity, the dividend yield is nearer to 1%, as market prices appreciate significantly. The handsome returns you earn in equity over a long holding period, say 12-20%, are driven largely by price appreciation. In bonds or debt investments, it is the reverse. Most of the returns come from the coupon or interest. On this aspect, InvITs are similar to debt investments, though there is no committed coupon.
In InvIT, the distribution yield is much higher than equity, say in double digits. Add a bit of price appreciation, and you are looking at returns similar to equity. The plus point here is the high distribution yield provides a measure of certainty to your returns.
For the sake of argument, even if you take price appreciation of InvIT as nil, you are still looking at decent returns by dint of distribution.
Returns from InvITs
In any investment, your return is the resale price or current market price over purchase price, plus the inflows in the interim. This principle is same for InvITs, but it is more nuanced. In an InvIT, money flows from the multiple SPVs or Holdco to the umbrella entity. This flow of money can be interest, dividend, repayment of capital and a bit of treasury income.
The head of money flow will be mentioned in the statement accompanying the payout. The point is, it is not a mono-source like dividend in equity or interest in bonds.
To understand returns delivered till date, the investor has to look at the total picture. As an example, at the beginning of a financial year, the market price of an InvIT, which was issued at a price of ₹100, was also ₹100.
At the end of the financial year, the market price of the InvIT rose to ₹103. Over the course of the financial year, the InvIT distributed ₹10 under various heads. Hence, the earnings for the investor for the year are ₹3 (price appreciation) plus ₹10 (distribution).
In place of market price, you may take the NAV, but the frequency of announcement is half-yearly. While NAV reflects the value of the assets owned by the InvIT, through the multiple SPVs, market price would reflect other data and outlook of market participants.
Conclusion
Allocation to InvITs in your portfolio can be a good diversification avenue. Apart from mild price appreciation, it provides a hedge against inflation. InvITs are relatively inflation-resilient because many underlying infrastructure assets, such as roads and transmission lines have tariff structures linked to inflation or periodic escalation clauses.
Equity investments, over the long term, beat inflation, but debt investments, in certain phases, underperform inflation. In InvITs, we have entities from multiple sectors, for example roads, power, telecom, optical fibre, warehousing, etc. The high credit rating from the rating agencies gives another layer of comfort.
Joydeep Sen is a corporate trainer (financial markets) and author. Views are personal