Invest in Invitations: Here is what you need to know

Copyright © HT Digital Streams Limit all rights reserved. Invitations seem tempting. But is it right for you? Infrastructure investment trusts or invitations are tools that enable investors to earn from the cash flow generated from different infrastructure assets. (Beeld: Pixabay) Summary Are you a senior citizen and investigate invitations for retirement income? Here is some knowledgeable advice on why it is not simple investments such as fixed deposits, and unlike Reits Sixty -year -old RAM was looking for some good investment options when he encountered Power Grid Infrastructure Investment Trust (Invit). It was an attractive option to close a high revenue during his retirement years at £ 86 and a return of 14%, and it appears to be an attractive option. After all, fixed deposits have 6-7% interest each year, and investment grade bonds could only amount to up to 10%. Ram, who was tempted by the high return, decided to consult his financial advisor before making a move. “That’s not how it works,” his advisor said. The understanding of invitations for the beginning, infrastructure investment trusts or invitations is tools that enable investors to earn from the cash flow generated from various infrastructure assets, including roads, power generation, transmission projects, optical fiber networks. Each invitation has earned an income -generating asset, and part of the income after the cost is deducted is distributed to investors. However, these are not debt instruments or traditional shares. Unlike FDS or bonds, where you get back the initial investment at the end of the term, there is no most important repayment for most invitations at the end of the tenure. In most cases, the underlying project is also not directly owned by the Unitholder, and it simply represents the rights to collect cash flow (such as tolls) for a fixed period. There are certainly exceptions such as warehouse invitations, in which the underlying asset is owned by the Unitholder, and the income will continue to generate as long as the asset remains occupied. When the warehouse ages, the underlying land and the building can be sold and distributed among investors or used to buy new assets. Also read: How invitations can add returns to your investment portfolio, so what was the 14% invitation return? Power Grid Invit distributed £ 12 to each of its shareholders in the previous financial year. However, this amount not only represents the interest payments, but also contains a component of capital refund. Since invitations do not return capital at the end of the expiry date, the return is not comparable to the returns or interest in fixed deposits. “People confuse reit’s returns and use it interchangeable with other instruments,” says Niraj Murarka, investment officer and head of real assets at 360 one asset. “It is wrong to compare this with other dividend yields. Although interest is of ordinary effects and FDS is pure interest, the invitation distribution includes interest, dividend and repayment of the capital.” The payouts in the previous financial year are also not a constant figure and tend to decline over time. For example, toll -based road invitations, after a certain period, will no longer have permission to raise tolls and will stop earning from it. In Reit’s, investors still own the underlying asset and the cash still flows as long as the building is intact and there is an occupation. Typically, an invitation can have 8-20 projects, each with a different ‘balancing period’, which means that each project can have a different lifetime until it can earn revenue. If there is a road asset and the license to take toll after a year expires, the income will stop from the next year. If this road project reaches £ 2 every year, and if the balance concession period of this project stops, Unith holders will get £ 2 less, or whatever the next year’s project could have earned. Certainly, invitations can choose to buy new assets when consisting of invitation projects expire by equipping or taking debt. Also read: Sebi’s big bet on Reit’s, invitations – do we fix what is not broken? Discounts to Navs Ram also noted that Power Grid Invit is trading at £ 86, while the net asset value (NAV) amounts to £ 94. Optically, it seems to trade at a discount of £ 8 to the fair value. He wonders if it offers a chance of capital appreciation. “It doesn’t work that way,” replied the financial advisor. Mutual Fund Navs is simple. The closing price of underlying securities is counted to reach the daily NAV of MF schemes. It is a relatively simple process and requires no subjectivity. It is generally considered a good representation of the underlying value of the scheme. On the other hand, the NAV of Invits is calculated very differently. The invitation trustee appoints a valuation agency every six months to get to the value of the underlying assets in the invitations. However, different valuation agencies use different methods and assumptions to get to the value of the same asset. It opens the NAV’s NAV -Subjective and for interpretation compared to other types of Nav’s, such as those used by MFs and ETFs. A number of factors can also play a role in the invitation of market prices. For example, traffic on a road can fall as a new, better road built, and this can lead to a reduced toll collection. Also read: Infrastructure Investment Trusts: How do they provide a new path for infrastructure financing? So you have to invest? Murarka said retail investors could invest in invitations through mutual funds or led by a professional financial adviser. The concept of invitations requires a detailed study of the underlying projects, lifespan of each asset and the cash flow potential it has. Such materials can best be studied by analysts or fund managers to make an informed decision, Murarka said. Although invitations have a low traded volume, and the free market cap of approximately £ 2,000 to Rs.19,000 crores, retail investors that invest some lakhs should not experience much liquidity problems. Mutual funds can invest up to 10% in invitations and Reit’s. The market regulator has suggested to increase this limit to 20% in equity and hybrid schemes. Taxation of invitations is more complicated than ordinary vanilla instruments, says Gautam Nayak, partner, CNK & Associates LLP. “While the interest component in the hands of the Unitholder is taxed against the plate rate, the dividend income may be taxable or tax -free, depending on the tax rate selected by the SPVs in which the invitation invested.” Capital refund is tax -free, but reduces the cost base and can be taxed as capital gains. Capital gain for the sale of invitations is in line with shares. “It is advisable to consult a tax expert to understand the implications,” Nayak added. Ram’s example is hypothetical. Catch all the business news, market news, news reports and latest news updates on Live Mint. Download the Mint News app to get daily market updates. More Topics #Money Read Next Story