Diversifying the portfolio is the smartest thing in investment. Diversification acts as a shock absorber in a particular sector. If you too want to invest in real estate and infrastructure but don’t have huge capital you still have some alternatives. Today we will tell you about two such instruments, REITS and InvITs, that will diverse your investment in the real estate and infrastructure sector.
InvIT is a collective investment scheme like a mutual fund. Mutual funds provide an opportunity to invest in equity shares, while InvIT allows investment in infrastructure projects like roads and power. InvIT is regulated by SEBI (Infrastructure Investment Trust) Regulations, 2014.
80% of InvITs assets are compulsorily invested in completed and revenue-generating projects. The InvITs also need to distribute 90% of their income to their investors/unit holders.
On the other hand, REITs are real estate-linked securities and can be traded on stock exchanges once they are listed. The structure of REITs is similar to that of a mutual fund. Like mutual funds, REITs have sponsors, trustees, fund managers and unitholders. While mutual funds invest in underlying assets, bonds, stocks and gold, REITs invest in physical real estate.
In this system, the money collected from income-producing real estate is distributed among the unitholders. Along with this, apart from regular income from rental and leases, profit from the immovable property also becomes a source of income for the unitholders. The properties can be residential or commercial such as apartments, warehouses, offices, etc. Investors get regular income as well as long-term capital appreciation.
Who can invest?
In 2019, capital markets regulator Securities and Exchange Board of India had reduced the minimum investment limit in InvITs and REITs, making them more accessible. The minimum subscription limit for REITs was reduced to Rs 50,000. This limit was reduced to Rs 1 lakh from Rs 10 lakh for InvITs.
However, the Union Budget 2021-22 has made it further easier. Now, the minimum application size for REITs is Rs 10,000- Rs 15,000. This brings them at par with equity IPO applications. Besides, the reduced lot size has made them easily tradable on stock exchanges. Apart from direct investments in REITs through the stock market, you can also invest in them through mutual fund schemes.
Why to invest in REITs and InvlTs?
- With REITs and InvITs, you can participate in growing sectors like realty and infrastructure without worrying thinking much about maintenance, title, stamp duty, and other expenses.
- These new instruments are new-age investment instruments that help investors to diversify their portfolios.
- They are a potential generator of regular income through dividends and assure profitable capital appreciation.
- Moreover, compared to a real project their ticket sizes are small, and the liquidity is much higher.
- Moreover, SEBI regulates these instruments which automatically reduces the chances of fraud.
- As mentioned about 80% of the fund is invested in income-generating and completed projects, this implies a low investment risk.
What to watch?
- These are market-linked instruments, so associated highly volatile remains there.
- 90% of the generated income by the REITs reaches back to the investors. Hence, reinvestments are lower which could weaken the prospects of capital appreciation.
- Moreover, an investment in the InvlTs is riskier as expected returns are based on predictions. Here the underlying projects involve political or regulatory risks sometimes and changes in the regulations may result in hurdles for the project.
Hence, if you have a risky but high-profit appetite then investing in REITs/InvITs can help you achieve your financial goals. However, before investing you must check the credit rating of the REITs and InvlTs and carefully evaluate the sponsor’s corporate profile and market standing before investment.