Should retail investors put money in InvITs?

Both REITs and InvITs add diversification to an investor’s portfolio

Many have started investing in real estate investment trusts (REITs)—however, not many investors look at infrastructure investment trusts (InvITs), another similar investment avenue.

As a product category, REITs and InvITs have the potential to earn better returns than fixed income instruments but lower than equities over the long term.

While both REITs and InvITs add diversification to an investor’s portfolio, the latter can be difficult for retail investors to understand. As the structure of InvITs is complex, investment advisors suggest that retail investors should not invest in them unless they understand the underlying business.

In 2019, capital market regulator Securities and Exchange Board of India had reduced the minimum investment limits on REITs as well as InvITs, making them more accessible. The minimum subscription limit for REITs was brought down to 50,000, from the earlier 2 lakh. For InvITs, it was reduced from 10 lakh to 1 lakh.

InvIT invests in infrastructure projects. The projects can be in sectors such as transport (road, bridges, railways), energy (electricity generation, transmission, distribution), communication, etc.

Apart from being difficult to understand for retail investors, each infrastructure project can have its own set of challenges. Unlike REITs, the cash flow in InvITs is less predictable. They depend on various factors such as tariffs, utilisation, etc.

There is also a regulatory risk in infrastructure projects. Government policies can affect their revenues. Due to their complexity, InvITs would be more suitable for high-net-worth individuals than retail.

Retail investors are better off investing in REITs, which is easier to understand and are not as sensitive to government policies. There’s also the predictability of cash flows as the office space is leased out for the long term.

(Do you have personal finance queries? Send them to [email protected] and get them answered by industry experts)

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