A Real Estate Investment Trust or REIT is an investment fund that owns and manages real estate assets. Individuals can invest in these funds by buying part ownership of real estate. They can earn income through capital appreciation, dividends and rental income.
An Infrastructure Investment Trust or InvIT is a trust that will have special purpose vehicles under which there are infrastructure projects going on. It will raise money from the public and invest that in projects. Retail investors can invest money in the InvIT and earn income in the form of dividend.
Why are they in news?
SEBI has allowed certain investors like international financial institutions and Non-Banking Financial Companies (NBFCs) to invest up to 25% of total offer size in REITs and InvITs. For example your mutual fund can now invest in InvITs.
Why should the retail investor be interested?
REITs are related to real estate. It is an asset class that can be invested in. Many people want to invest in real estate but are unable to do so because of the huge sum of money required. REITs are a good opportunity. They can invest in real estate with lesser capital investment. REITs can provide the opportunity to invest in real estate without the tedious documentation involved in a real house. They will be regulated and so there is less chance of losing money in real estate investment. They will be listed in the stock market.
InvITs are vehicles to invest money in infrastructure projects. Such projects always need money and InvITs can provide them with it. Once the projects are in motion, they will get other sources of finance which will in turn be advantageous to the InvITs.
Three fund houses - Birla Sun Life Asset Management Co. Ltd, DSP BlackRock Investment Managers Pvt. Ltd and ICICI Prudential Asset Management Co. Ltd have circulated notices that some of their schemes will invest in InvITs. If as an investor in any of these schemes you are not comfortable with this decision, you can redeem your investments without paying any exit load within a certain timeframe.
What are the advantages and disadvantages in REITs and InvITs from an individual investor perspective?
- Individual investors can invest in real estate and infrastructure in a more easier and structured manner with these investment vehicles.
- They can earn returns on their investment.
- REITs can be listed in the market which means they will be regulated and investors can easily make investments and exit from the investments.
- IRB Infrastructure has come up with an infrastructure investment trust (InvIT). 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. Here are the details -
- Minimum application size – 10,000 units and in multiples of 5,000 thereafter.
- Investors - Institutional and non-institutional investors can invest. 25% is reserved for non-institutional investors.
- Returns - Income generated by the underlying assets have to be distributed as dividends among investors. An InvIT has to pay dividends at least twice a year as per SEBI ruling.
- Listing – It will be listed in the market. Therefore regulations are in place and you can exit from the investment as per your convenience.
- REITs have been allowed to be operational for quite some time. But not one is listed. Retail investors stay from them as the initial investment amount is still big. They are not sure of the performance of REITs.
- The IRB InVIT fund listed at a slightly higher price than the issue price but the other InVIT fund that made its debut – IndiGrid InVIT has had a bad beginning.
As a retail investor, you need not rush to exit from your mutual fund schemes that are going to invest in such instruments. They are professionally managed and so there will be proper steps taken.
The minimum investment amounts are huge in both and the instruments are not highly liquid. So there is a risk of you not getting your capital back when you want it. Returns are expected to be more than fixed income securities which is beneficial for a retail investor. It is better to participate in them through mutual funds and use the wait and watch policy to understand the instruments better before investing in them directly.