InvITs is a new categor and investors will certainly look at this product to diversify their portfolio
Getting a piece of income from infrastructure like roads, bridges, fuel pipelines and electricity transmission assets wasn't possible earlier. All you could do was pay for using them. However, the Securities and Exchange Board of India (Sebi) has paved way for introduction of Infrastructure Investment Trusts (InvITs) and over the next few months investors will see different InvITs coming to raise large amounts of money from the public, in return giving the opportunity to own a share of income. Experts tell DNA Money that InvITs have their share of the good, the bad and the ugly, and investors must understand the assets before they take the plunge.
The basics: The most important thing about InvITs is its a new category. Many investors will certainly look at this product as a means of diversification for their portfolio. What makes InvITs special is that they are trusts which issue units against underlying revenue generating infrastructure assets that been giving revenues since at least for a year.
The return on InvIT assets are driven from the terms of concession agreement entered with the government. The underlying assets ensure that InvITs can give steady income to the holders of the units on more or less assured returns basis. This is possible because most (90%) of the distributable cash flow from the InvITs' assets has to be distributed minimum twice in a year. In more developed markets like the US, infrastructure asset owning trusts often offer 5-10% in annual dividend yields.
For the common man, the units owned in an InvIT are like equity shares of a company, but the regular pay-outs may make the units appear like a fixed income instrument. For a unit-holder in an InvIT, they can get 'interest income' received from InvIT, 'dividend income' distributed by the InvIT, 'capital gains' on sale of units and also any 'other income' distributed by the InvIT.
Tax implications: Usually, most types of income are taxed under Indian laws. Just like capital gains on sale of equity share and income from bank deposits are taxed, unit-holders of InvITs must understand the tax implications. Experts say that interest income shall be taxable in the hands of unit holders as if they have received the interest directly. However, dividend income distributed by the trust is exempt in the hands of unit holders.
Sale of listed units of InvIT on the exchange to attract levy of STT (securities transaction tax) at par with that of listed equity shares. "Long-term capital gains (LTCG), where units held for over 36 months, would be tax exempt. Short term capital gains (STCG) would be taxable at 15%. Where sale of units is off the exchange, LTCG is taxable at 20% and STCG at applicable rates," says financial consultant Ramesh Sinha.
The hybrid structure for InvIT enables investors to capture the value of potential growth in the InvIT assets, as opposed to steady fixed return in debt structure, says Bhairav Dalal, partner - real estate tax, PwC India.
Risk and returns: Risk free interest rates have been declining for quite some time. This is why investors keep on searching for new investment avenues to get better returns. "But InvITs are not risk-free in any way. They are exposed to vagaries of business environment. The level of distribution may fall if underlying assets earn less, or swing to losses. Also, please bear in mind that InvITs are a new product with almost zero track record," says Sanjiv Singh, a financial advisor for business families.
Many experts feel conservative investors should play the waiting-game for InvITs. "Despite the general dip in the interest rates in the market, the incremental yield on InvITs is not commensurate with the incremental risk involved in InvITs. Given this, the retail investors, on the look-out for risk-free returns, may still not be completely inclined to invest in InvITs," said Dalal of PwC India.
Experts advice investors to understand the nitty-gritty of owning a part of infrastructure. Because InvITs are a proxy to infrastructure assets, investors must understand the specific risks involved when it comes to roads, pipelines or even electricity grids.
This is because roads, and pipelines are vastly different. "Any new idea such as InvITs may prove to be a winner over the long-term, but it is important to know what you are buying today i.e. asset quality.
The risk-reward ratio should be in your favour. We also believe new investment avenues should not get more than 5-7% exposure of your investment portfolio. This is true for somebody with net-worth of Rs 1 crore, and also for somebody who has Rs 50 crore," opines Sandeep Chaddha, a financial planner.
KNOW THE INVESTMENT AVENUE
- InvITs is a new categor and investors will certainly look at this product to diversify their portfolio
- The return on InvIT assets are driven from the terms of concession agreement with government
- Hybrid structure for InvIT enables investors to capture the value of potential growth in the InvIT asset
- Experts advice investors to understand the nitty-gritty of owning a part of infrastructure
- New investment avenues should not get more than 5-7% exposure of your investment portfolio
- Many experts feel conservative investors should play the waiting-game for InvITs
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