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How to Invest in InvITs: A Step-by-Step Guide

By allowing individuals to own a stake in established or upcoming infrastructure projects, InvITs offer a unique way for portfolio diversification, making them an attractive option for investors.

  • 1,976 Views | Updated on: Mar 12, 2024

InvITs, or Infrastructure Investment Trusts, allow you to own a piece of infrastructure projects, like roads or power plants, through shares traded on a stock exchange. These investments are overseen by financial authorities to ensure safety. Experts manage InvITs, so you do not need to worry about managing the projects. They pay out income through dividends, interest, and potential price increases.

What are InvITs?

InvITs are investment pools that collect money from many people (like a mutual fund) and use it to buy and manage infrastructure projects. These projects are already built or nearing completion, so you are not investing in risky startups.

InvITs are important as they help any country grow by bringing more money into infrastructure, which everyone needs. They aim to give investors a steady income stream through regular dividend payouts.

What are the Types of InvITs?

There are two main ways to invest in infrastructure projects through InvITs:

Ready-to-Earn

Ready-to-earn type InvITs invest in completed projects that are already generating income. Think of it like buying a rental property that is already collecting rent. These InvITs often raise money through public offerings, open to everyone.

Building for the Future

This type of InvIT invests in projects under construction or recently finished. These can include operations like supporting the construction of a new shopping mall. These InvITs typically raise money through private placements, selling units to a limited group of investors.

How to Invest in InvITs?

As an investor, InvITs are an excellent opportunity to help you generate wealth through safe options. To invest in InvITs, you have to follow certain steps:

Step 1. Understand Your Options

  • Direct Investment: You can invest directly in listed InvITs through a demat account, similar to buying stocks. It offers flexibility and control but requires more research and understanding of the market.
  • Mutual Funds: Some mutual funds invest a small portion of their portfolio in InvITs. It provides diversification and professional management but with limited exposure to the infrastructure sector.

Step 2. Choose an InvIT

  • Research the underlying assets: Understand the type of infrastructure projects (roads, power, etc.) and their potential risks and returns.
  • Evaluate the sponsor and manager: Look into their track record, experience, and financial stability.
  • Consider the dividend yield: This shows the income you can expect from the InvIT.
  • Compare costs: Look at fees associated with different platforms and InvITs.

Step 3. Get Started

  • Open a demat account: If you choose a direct investment, you need a Demat account to hold your InvIT units.
  • Choose your investment platform: Select a broker or mutual fund platform that offers InvIT investment options.
  • Start investing: Once you have chosen your InvIT, place your order through your chosen platform.

Remember that InvITs are subject to market risks. Their value can fluctuate, so invest what you can afford to lose. InvITs offer long-term investment, and therefore, you should aim for a holding period of several years to benefit from potential capital appreciation alongside regular dividends.

What are the Benefits of InvITs for Investors?

While InvITs were previously considered among the costlier investment options, they have several advantages for investors. Some of the key benefits associated with InvITs are:

Portfolio Diversification

InvITs with diverse assets allow investors to diversify their investment portfolios. This diversification directly contributes to risk reduction, enabling investors to generate consistent returns over the long term.

Fixed Income Accrual

The ability to redistribute risks and accumulate a fixed income is a robust option for generating stable returns, particularly for retirees. Including such an investment tool can be beneficial for effective retirement planning.

Liquidity

Entering or exiting an infrastructure investment trust is relatively straightforward, enhancing liquidity. However, selling a high-valued property might pose a challenge for small investors.

Quality Asset Management

InvITs provide investors with the opportunity to have their assets professionally managed. It ensures efficient management and resource allocation, guarding against the fragmentation of holdings.

How Do InvITs Yield Returns for Investors?

Generating returns is a crucial aspect of any investment to attract investors. InvITs achieve this by overseeing and operating the infrastructure projects within their portfolio.

For instance, let us consider a scenario where a company managing a bridge imposes a toll of ₹50 for each car crossing the bridge. This toll constitutes the revenue generated by the project. However, it is essential to note that the entire income is not distributed directly to the InvIT unitholders. Various expenses, such as depreciation, maintenance, and operational costs, need to be subtracted from the income to determine the “net distributable cash flow” (NDCF) of the project.

Who can Invest in InvITs?

While InvITs offer some attractive benefits, they may only suit some investors. Here is a list of investors who might find them beneficial:

  • Diversification seekers: InvITs can offer exposure to infrastructure projects and potentially reduce portfolio risk if you want to spread your investments beyond traditional stocks and bonds.
  • Regular income seekers: InvITs are mandated to distribute most of their income as dividends, making them attractive for those seeking regular cash flow, especially retirees.
  • Long-term investors: InvITs are primarily long-term investments, so they suit individuals with an investment horizon of at least 5-10 years.
  • Risk-tolerant investors: While offering relatively less volatility than direct infrastructure investments, InvITs are still exposed to market fluctuations and sector-specific risks. You should be comfortable with some level of risk.
  • High-net-worth individuals: Due to the minimum investment amounts, InvITs often cater to individuals with higher investible capital.

Final Thoughts

InvITs present a compelling investment opportunity for diverse investors. They offer long-term investment opportunities, making them suitable for individuals with an investment horizon of at least 5-10 years. They bring together the benefits of portfolio diversification, fixed income accrual, and professional asset management, making them an appealing choice for a wide range of investors looking to participate in the growth of India’s infrastructure sector.

As an investor, you can opt for this option of investment if you want to have a stable source of income and contribute to the infrastructure growth of your country.

Key Takeaways

  • InvITs enable individuals to own a share of established infrastructure projects such as roads and power plants through shares traded on a stock exchange.
  • One can invest in InvITs directly through a demat account, similar to buying stocks, or indirectly through mutual funds of any company invested in InvITs.
  • InvITs generate returns by overseeing and operating infrastructure projects within their portfolio.
  • These are suitable for individuals seeking portfolio diversification, investors with high-risk tolerance, or people looking for long-term investments.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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