Introduction to Infrastructure Investment Trusts

Indian investors often think of roads power lines pipelines and telecom towers as distant assets owned by large companies or the government. In reality there is a route that lets ordinary savers participate in such projects in a simple listed format. That route is through infrastructure investment trusts.

If you already invest in mutual funds or buy bonds understanding this product gives you one more way to build income and diversification into your portfolio.

What are infrastructure investment trusts

Infrastructure investment trusts or InvITs are trust structures that hold operating infrastructure assets. These assets can include toll roads power transmission lines gas pipelines telecom towers or renewable energy projects.

The trust raises money from investors by issuing units. With that money it buys or receives a portfolio of projects from the sponsor which is usually an infrastructure developer or corporate group. Investors who hold units receive a share of the cash flows that these projects generate over time.

In India many InvIT units are listed on stock exchanges. You can buy and sell them through your demat account similar to shares subject to trading volumes.

How InvITs generate cash flow

Most InvITs focus on assets that already operate and earn steady income. Cash flow usually comes from

1. Tolls and user charges
2. Fixed payments under long term contracts
3. Periodic escalation clauses in those contracts

From this revenue the trust pays for maintenance operations insurance staff interest on loans and other expenses. A large part of the remaining distributable cash then has to be paid out to unit holders as regular distribution according to rules.

So as an investor you receive periodic cash flows that are linked to the performance of real projects not just market mood.

How InvITs compare with buying bonds and equity

If you buy bonds from a strong issuer you act as a lender. You get a fixed coupon and principal at maturity if all goes well. Risk is lower and returns are more predictable.

If you buy shares in a normal company, you are an owner. Your returns depend on profit growth and valuation. Income may come as dividends, but the main driver is price movement which can be volatile.

InvITs sit somewhere between these two.

1. They focus on income like many fixed income products but the payout is not guaranteed the way a coupon is. It depends on project cash flow.
2. They trade on exchanges like equity and their prices can move with interest rates traffic growth policy changes and market sentiment.

For an investor who likes to buy bonds for safety an InvIT is better seen as an income oriented satellite holding not as a replacement for core high quality bonds.

Key factors to check before investing in an InvIT

Before you choose an InvIT spend time on a few basics.

1. Quality of underlying assets
2. Look at the type of projects location and track record. Established toll roads and power lines with long contracts are usually more stable than assets that depend heavily on economic cycles.
3. Counterparty and contract structure
4. Check who is paying the InvIT and how long the contracts run. Contracts with reputed counterparties and long residual life give better visibility.
5. Leverage level
6. Infrastructure often uses debt but too much borrowing can create stress if cash flow dips. Moderate leverage is easier to manage.
7. Distribution history
8. See how regular and predictable past distributions have been. Read the policy on what share of cash earnings will be paid out versus reinvested.
9. Governance and sponsor quality
10. Strong sponsors and a transparent manager give more comfort since they take day to day decisions on asset maintenance refinancing and acquisitions.

Where infrastructure investment trusts fit in a portfolio

If you are building a long term plan you can think of three main buckets.

1. Safety and income through deposits and high quality bonds
2. Growth through equity funds and shares
3. Real assets and diversifiers where InvITs sit alongside products like REITs

Start by securing your core needs with safer options then add InvITs in a measured way if you understand the structure and are comfortable with some price movement.

For many Indian savers infrastructure investment trusts are a way to participate in the country growth story beyond traditional stocks. You do not need to build a highway or a power line yourself. You simply need to understand how these trusts pool such assets and share the cash flow with investors who are willing to think a little beyond the usual decision to only buy bonds and shares.