InvITs: an Avenue to Earn from Infrastructure Investments

Infrastructure Investment Trusts (INVITs): an Avenue to Earn from Infrastructure Investments

Infrastructure Investment Trusts (InvITs) sit in an interesting corner of the market: visible, listed, and yet not clearly understood. They are often pitched as “earn from toll roads” or “own power lines,” which is directionally correct but intellectually lazy. The reality is more nuanced, and more compelling if understood properly.

The Concept: what are you buying?

At their core, InvITs are trust structures that own and operate income-generating infrastructure assets – roads, transmission lines, gas pipelines, warehouses, telecom towers, etc. Securities and Exchange Board of India (SEBI) regulates them, and they are listed on stock exchanges, making them accessible like equities.

Think of them as the infrastructure equivalent of mutual funds. Instead of buying shares of companies, you are buying units of a vehicle that owns real assets i.e. differentiated from financial assets like stocks or bonds owned by mutual funds.

The structure is:

• A sponsor (usually a developer like a power or road company) transfers assets into the trust;

• An investment manager does financial management and capital structuring, declares distributions;

• A project manager operates and optimizes these assets;

• A trustee safeguards investor interest.

The key feature, and the real attraction, is distribution. InvITs are required to distribute at least 90 percent of their net distributable cash flows to unitholders. In simple terms: these are yield vehicles.

Investment Rationale

InvITs solve one basic portfolio problem: how to generate predictable cash flows without taking equity-like volatility.

There are four reasons why they deserve a serious look:

1. 1. Predictable income (the core appeal)

InvIT cash flows come from contracted or regulated assets – toll collections, transmission tariffs, or lease payments. These are not cyclical earnings in the traditional sense. This makes them closer to a high-yield bond than equity.

2. 2. Inflation linkage

Many infrastructure contracts have built-in escalation clauses (e.g. toll rates linked to inflation). This gives InvITs a rare characteristic: income that can keep pace with inflation, unlike fixed deposits.

3. 3. Diversification benefit

InvITs have low correlation with equities. They don’t move because of earnings upgrades or downgrades; they move based on interest rates, asset performance, and yield expectations.

4. 4. Accessibility at small ticket size

For a small ticket size e.g. one unit in the secondary market / as per your corpus, you can access this asset class. Historically, infrastructure was a playground for sovereign funds and pension money. InvITs democratize access i.e. retail investors can now participate in these infrastructure assets.

The macro case for InvITs in India is:

• India is entering an infrastructure buildout cycle;

• Government programs like national monetization pipelines are feeding assets into InvIT structures;

• The market itself is expected to grow significantly.

This creates a steady pipeline of new assets – roads, renewable energy, transmission networks, that can be monetized via InvITs. In essence, InvITs are becoming the financial bridge between public infrastructure needs and private capital.

How does the structure work?

At the core of every InvIT is Net Distributable Cash Flow (NDCF).

Cash flow waterfall illustration:

Regulation requires ≥90% of NDCF to be distributed, which drives distribution yield mentioned earlier.

Implication:

• Higher leverage → higher distributable yield

• Stable assets → tighter yield band (8–10%)

• Riskier assets → wider yield band (10–14%)

InvITs and expectations

Some of the InvITs in India are:

• IndiaGrid Infra Trust (IndiGrid): Invests in power transmission, renewable energy and energy storage;

• National Highways Infra Trust (NHAI InvIT): Backed by NHAI, focusing on road projects;

• Vertis Infra Trust and Cube Highways Trust: Primarily holds road and highway assets;

• Energy Infrastructure Trust: Involved in energy and gas pipeline projects;

• Altius Telecom Infra Trust & NDR InvIT Trust engaged in telecom and warehousing sectors

Infrastructure Investment Trusts (InvITs) are often slotted into ‘alternatives’ for easy reference but they behave like listed yield instruments with embedded leverage. The leverage is, they avail of funding from banks or issuance of bonds, and deploy. The market narrative tends to oversimplify them as stable income products.

The distribution is largely a function of (a) distributable cash flow, (b) extent of leverage (funding availed) and (c) interest rate spreads i.e. difference between cost of funds and earnings from assets. As an example, if cost of funding is 8 percent and asset yield is 12 percent, interest spread is 4 percent. This spread drives equity yield and distribution growth potential.

Taxation

The implication is, you need to track the breakup of distributions, not just total payouts. Not to worry, it is mentioned in the statement accompanying the distributions.

Where InvITs fit in a portfolio

For a perspective on how to look at InvITs, the broad guideline is:

• A fixed-income alternative with relatively higher risk-return but, not an equity substitute;

• A cash-flow generator, not a compounding machine like equity over a long period of time;

• A portfolio diversifier, not a core growth allocation.

As an illustration, you may refer the following:

Inference:

• Higher return than debt

• Lower volatility than equity

• Moderate diversification benefit

InvITs won’t outperform equities in a bull market. These won’t protect fully in a rate shock. But in a portfolio context, they offer something rare: visible cash flows with moderate return certainty. And in markets where most returns are narrative-driven, that kind of predictability is a feature, not a limitation.

Joydeep Sen is a corporate trainer (financial markets) and author