Your Money – InvITs: A long-term investment avenue

In structure, these are similar to mutual funds. But the two differ in terms of how the money is invested and income distributed.

By Piyush Gupta

Securities and Exchange Board of India (Sebi’s) recent move to reduce the minimum subscription threshold and trading lot size in infrastructure investment trusts (InvITs) unlocks a new avenue for retail investors who have a long-term investment horizon.

Sebi has, in its June 29 board meeting, reduced the minimum subscription for investment in InvITs to Rs 10,000-15,000 from Rs 1 lakh earlier and the trading lot size to one unit from 100 units, thus enhancing access to retail investors. The move also paves way to enhanced liquidity of the instruments and better price discovery in the secondary market.

Know InvITs from mutual funds
InvITs are capital market products that own, operate, and invest in completed as well as under-construction infrastructure projects such as roads and highways, power distribution networks, telecom towers, and fiber optic networks.

In structure, these are similar to mutual funds. But the two differ in terms of how the money is invested and income distributed. At least 80% of the monies with InvITs have to be invested in infrastructure assets that are completed and revenue-generating. Further, 90% of the net distributable cash flow in InvITs has to be mandatorily distributed to unitholders at least once in six months.

Interest or dividends received from InvITs is taxed as per the individual’s income tax slab, while capital gains are based on the holding period. For a holding period of less than three years, short-term capital gains tax of 15% is applied on the profits, while for over three years, long-term capital gains of 10% is applied on appreciation of more than Rs 1 lakh.

A long-term diversification opportunity
InvITs present investors with an able long-term investment avenue in an alternative asset class such as infrastructure. The requirement of InvITs to allocate 80% of portfolio in revenue-generating assets, along with distribution of minimum 90% of profits to investors, provides comfort of regular income to its investors in addition to capital gains on account of change in price of units traded on the exchange.

Three things to watch out for
One, distribution of income from InvITs, which is subject to earnings from the underlying infrastructure assets held in the portfolio and the type/nature of these assets. Two, liquidity of listed InvITs is subject to their trading on stock exchanges. Third, investors need to consider the profile and track record of the Sponsor(s) and Investment Managers of the InvITs. The Sebi’s move to ease access to InvITs could emerge as a win-win for the infrastructure sector and investors. The product feature to provide regular income could come in handy for investors planning their retirement portfolio.

That said, better awareness of these products and their depth in the capital market, as well as stable regulations, are essential to the success of InvITs.

The writer is director, Funds and Fixed-Income, CRISIL Research

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