Before I begin with the core idea behind this post, let me go ahead and unequivocally mention that it is neither strange nor embarrassing to admit that it is difficult to comprehend everything mentioned in our good ole’ business dailies like ET, Business Standard, Mint etc.
Well, I may be wrong about most of my readers (and that’s a wonderful thing) but I often realize the utmost significance of drugs like Saridon because of these dailies.
Couldn’t it all be simpler? Don’t you direly wish that some of the significant concepts can be understood without taking a Saridon?.We hear you and have already acted upon it. As a first, Fintuned has already picked up a novel concept that has been doing media rounds frequently now. Our attempt is to pick up complex concepts (at least by our judgement) and try to decode them in the simplest manner possible. So, any guesses on what’s on the table today!
Well, it is literally raining infrastructure investment trusts (InvITs) in India!
So let us try to decrypt this exasperating farrago of distortions today (Don’t worry, there’s no copyright. I googled. ;))
What are Infrastructure Investment Funds (InvITs)?
Remember mutual funds? Okay, I’ll remind you.
You invest your money in a mutual fund company and get ‘units’ in return. The company is managed by professional managers who invest your money in stocks and relieve you of all the brain storming involved in buying/selling them. You earn through dividends and appreciation in the value of the stocks invested in by your portfolio manager.
Well, Infrastructure Investment Funds are based on a similar concept.
InvITs are listed on exchanges just like stocks — through IPOs. InvITs invest in infrastructure projects from the money collected from people who have subscribed to their shares. They give you fixed returns (not less than once in 6 months) and dividends.
Why has the concept of InvITs been introduced?
Well, infrastructure projects require a lot of capital and long term finance and take some time to generate steady cash flows. Meanwhile, the infrastructure company has to pay interest to banks for the loans taken by it. An InvIT gives leeway to the company to fulfill its debt obligations quickly by investing in their projects and releasing the capital of the developer.
What is the structure of InvITs?
InvITs are registered as trusts with SEBI and there are four parties — trustee, sponsors, investment manager and project manager.
For which class of investors are InvITs suitable?
The minimum application size for InvIT units is INR 10 lakh. The primary investors could be foreign institutional investors, insurance and pension funds and domestic institutional investors (like mutual funds, banks) and also super-rich individuals.
But why should I consider investing in these?
There is combination of factors like good investment returns, tax efficiency and exposure to infrastructure sector which make them an enticing option.
According to SEBI rules, at least 90% of funds collected, after paying for expenses, taxes and repayment of external debt, should be passed on to investors every six months. IRB InvIT, India’s first infrastructure investment trust fund is expected to pay about 12% as returns to investors. Good deal, eh?
Also, Dividend income received by unit holders is tax exempt. Short-term capital gain on sale of units is taxed at 15%, while long-term capital gains are tax exempt. However, interest that is distributed to unit holders is taxable.
Aren’t they risky?
The following precautions have been taken by the regulatory bodies to shield investors from construction risk and protect their investment from getting stuck in stranded projects:
However, as in mutual funds, investors in InvITs have no control over investments and exits being made by the trust.
Weigh your options wisely and take advantage of the plethora of opportunities that the infrastructure sector has to offer! InvITs are definitely a good avenue for investors who are bullish on the sector but may not be completely confident on ways to play the sector.