Investors' guide to investing in the country's first InvIT

The country’s first infrastructure investment trust (InvIT) by road developer IRB Infrastructure Developers (IRB Infra) will hit the market next week. An InvIT or real estate investment trust (Reit) is a vehicle that owns, operates and maintains income-generating infrastructure or real estate assets. The income generated by the assets is distributed to unit holders in the form of dividends. For instance, the IRB InvIT Fund will manage six toll road projects as a part of its portfolio. The performance of these projects will impact the price of units. The nuts and bolts of investing in an InvIT is similar to that in an initial public offering (IPO). The following are the key differences between the two:

Minimum investment size: The minimum application size is 10,000 units and multiples of 5,000 units thereafter. Each unit of IRB InvIT is priced around Rs 100- 102. So the minimum investment size works out to Rs 10.02 lakh at the top end of the price band and multiples of Rs 5.1 lakh thereafter. This is quite high compared to an IPO, where the minimum entry size is between Rs 15,000 and Rs 20,000.

Category of investors: An InvIT IPO will have only two bucket of investors — institutional and non-institutional. In comparison, a normal IPO has three buckets — institutional, non-institutional and retail. Around 75 per cent of the InvIT offering will be reserved for institutional investors, while the remaining 25 per cent is for non-institutional investors, where individual investors can bid. Similar to an IPO, up to 60 per cent of units in the institutional bucket can be given to anchor investors. Also, besides pension funds, all other categories of investors, including foreign portfolio investors (FPIs), mutual funds, banks and insurance companies are allowed to invest in InvITs. Mutual fund schemes have to take one-time unit holders’ approval to invest in InvITs. Most fund houses have already began the process.

Returns and listing gains: Just like an IPO, there is no fixed return component in an InvIT offering. Depending on the estimated yield of the underlying assets, the price of the units can fluctuate. In case of IRB Infra, the projected yield is 12 per cent. In other words, based on the underlying assets’ track record and projected future income-generation, an investment of Rs 100 will earn an yield of 12 per cent. If true, the yield is attractive compared to fixed-income instruments, which typically give returns between seven and eight per cent. If secondary market investors feel 12 per cent is an attractive yield and buy aggressively, the price of the units might go up and hence, the yield may come down. If due to some negative news, the projected yield goes down, the price of the units will depreciate. All the income generated by the underlying assets have to be distributed to unit holders in the form of dividends. According to Sebi rules, an InvIT has to compulsorily pay dividends at least twice a year.

Tax implications: Taxation on InvITs is similar to that on securities investment. If an investor books a capital gain within one year, it will attract 15 per cent short-term capital gains tax. Long-term capital gains tax will be exempt. Also, there will be no tax on dividend income for unit holders.