Advising against indiscriminate investment, the Client Associates study calls for a well-informed approach to maximise returns from InvITs, as infrastructure creation gathers pace.
A recent study has revealed that while infrastructure investment trusts (InvITs) are only nine years old in India as a financing instrument, they have delivered average pre-tax returns of 10-12 per cent and post-tax returns of 7-9 per cent, outperforming conventional fixed-income options. A majority of these returns have come through steady distributions.
The study by the Gurugram-based multi-family office (MFO) firm Client Associates also notes that InvITs have exhibited price volatility in recent years, reflecting their hybrid nature and associated risks. While they have outperformed several traditional debt instruments in post-tax yield, price movements can materially affect total return outcomes.
InvITs exhibit a distinct risk-return profile, with volatility of 10.2 per cent compared to 15.4 per cent for equities. They offer a relatively stable investment profile while delivering total returns of 12.2 per cent, which is slightly below the 12.3 per cent from equities, but with more predictable income.
Client Associates positions InvITs within the alternative debt sleeve of a diversified portfolio. According to the study, they provide diversification benefits through low correlation with traditional asset classes. A correlation coefficient of 0.42 with equity markets stems from infrastructure assets’ utility-like characteristics and contracted revenue streams that are largely independent of economic cycles.
The correlation coefficient indicates how closely an asset’s returns move in relation to equity markets.
InvITs’ portfolio functions include income generation similar to fixed-income assets but with higher yields, diversification through low correlation with equities, and inflation hedging, as infrastructure revenues are often linked to inflation indices.
InvITs are suitable for income-focused individuals seeking stable recurring income, conservative investors looking for superior post-tax yields, diversification-oriented investors participating in India’s infrastructure growth, and those with long-term horizons willing to ride out price volatility.
Careful Selection
Importantly, the study cautions against indiscriminate investment and advocates a more selective approach. Entry valuation, liquidity, and tax treatment of distributions are critical to achieving superior risk-adjusted returns. It identifies four key factors that shape a well-informed investment approach.
Liquidity remains a constraint. Of the 27 registered InvITs, the investible universe for retail investors is markedly narrow. Currently, only about six publicly listed InvITs are sufficiently liquid and do not require special arrangements for buying or selling units.
Tax efficiency plays a decisive role in post-tax returns. The distribution mix between interest, dividends, and capital repayment significantly affects investor outcomes. On average, approximately 75 per cent of distributions are taxable—primarily interest and dividends—while the remaining 25 per cent, mainly capital repayment, is non-taxable. This mix has a material impact on post-tax yields, especially for investors in higher tax brackets. The distribution profile also varies widely across InvITs.
Entry valuation is crucial, with the purchase price determining yield and total return. Investors must assess the quality of underlying assets, debt levels, and the sponsor’s track record to avoid price erosion risks that can diminish overall returns.
Sponsor strength is a defining factor. Strong and credible sponsors enhance asset quality, operational performance, and investor confidence. Their reputation and execution capabilities often determine the long-term viability and stability of the InvIT.
Market Limits and Growth
The study acknowledges current market limitations. Retail participation remains modest at around 7 per cent of total ownership, reflecting low awareness, liquidity constraints, and the specialised nature of the asset class. Promoters hold nearly 48 per cent, while institutional and foreign investors together account for over a third.
Despite these constraints, the study forecasts substantial growth. Industry estimates suggest that the InvIT market could reach ₹21 trillion ($252 billion) in assets under management by 2030, tripling from current levels. This expansion will be driven by infrastructure investment needs of $4.5 trillion, government initiatives like the National Infrastructure Pipeline, rising institutional allocations, corporate capital optimisation, and low retail penetration.
While InvITs are emerging as a key component of India’s infrastructure financing strategy, the study urges careful examination of liquidity, asset quality, and project fundamentals. Investors are advised to maintain moderate expectations for capital appreciation and keep longer investment horizons of three years or more due to the associated price volatility of InvITs in the short-to-medium term.
The study concludes that future success will depend on continued regulatory support, improved liquidity through greater retail participation, and the development of a robust secondary market that enhances price discovery and investor confidence.
– Manish Pant