In the news
October 7, 2021
Because they are a safe and transparent investment in infrastructure assets that generate income, they are universally accepted.
Offering a hedge for the investment portfolio, infrastructure assets are an ideal diversification strategy. For investors, InvIT is a way to gain exposure to an infra project without the accompanying liquidity risk.
Regular, predictable and steady cash distributions are guaranteed by InvITs making them perfect for investors who need a consistent income. InvITs also give more yields than typical fixed deposits, bonds and inflation.
Investors can invest and trade in small amounts because InvITs are liquid. Though the project management of an asset is left to the professionals, investors still have ownership of it.
Finally, the volatility of the overall portfolio is significantly reduced by InvITs. This is because they tend to have lower beta than benchmark indices and a lower correlation with public equity markets.
There are 4 aspects one needs to keep in mind before investing in InvITs.
First, we must understand the equity-like risk of InvITs. They are equity stocks issued by companies that own income-generating infrastructure assets. The majority of their income is distributed to investors in the form of interest/dividend income. Even though distribution certainty is high, there is still some volatility. If there is a sector overlap or a common investee company between listed equity stocks and InvIT units in the same portfolio, there is also a risk of lack of diversification.
Second, keep an eye on yields. Because of their AAA rating in India, InvITs should offer yields in line with or higher than AAA-rated corporate bonds. Thus, it is crucial to focus on the expected Distribution per unit and underlying NAV growth. Buying the InvITs at any price could be harmful since they could mean lower than commensurate yields.
Third, Covid-19 has impacted different underlying assets differently. In the first phase of the lockdown, toll road InvITs were badly affected because of the halt in traffic activity. Power lines on the other hand were operating as usual, keeping distribution payouts on track. Some assets can also be affected by natural disasters, gas explosions, or terrorist activities.
Fourth, investors should have a medium to long-term holding horizon. Because invITs have debt-like structures, investors should expect higher volatility and risks than with fixed income. The global slowdown, the Russia-Ukraine conflict, central bank monetary policy normalization, and persistently high inflation have heightened short-term uncertainty. The rapid tightening of financial conditions can cause instability and unpredictability in capital markets. Also, the daily liquidity, or volumes traded on exchanges per day, for some InvITs, particularly Private Listed InvITs, may be low, making it difficult for investors to exit quickly.