Trusts Outperform Inflation with Steady Returns in Indian Markets

Indian equity markets have struggled to consistently outpace inflation over recent years. The benchmark Nifty 50 Total Return Index (TRI) generated a compounded growth rate of 6.7 percent over the past three years, modestly ahead of the consumer price inflation (CPI) of 4.1 percent. Meanwhile, a fixed deposit at the State Bank of India (SBI FD) offered a similar return of approximately 6.5 percent during the same period.

Extending the timeline to five years reveals a comparable pattern. The Nifty TRI recorded a compound annual growth rate (CAGR) of 5.4 percent, barely surpassing the CPI’s 4.95 percent, while the SBI FD matched the 5.4 percent return. These figures reflect a common challenge faced by equity investors aiming for strong inflation-beating gains in India.

However, a distinct category of securities has delivered better risk-adjusted returns and stable income streams: Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs). These investment vehicles not only offer attractive double-digit returns but typically involve less volatility compared to direct equity exposure.

Understanding InvITs and REITs

InvITs and REITs are relatively recent additions to the Indian capital markets. Although the Securities and Exchange Board of India (SEBI) established the regulatory framework in 2014, the first InvIT listing occurred in May 2017 with the IRB InvIT Fund, followed by the Embassy Office Parks REIT debuting in April 2019. Since then, several publicly traded entities have emerged in these sectors.

This analysis focuses on publicly listed InvITs and REITs with at least three years of market history. The sample includes Powergrid Infrastructure Investment Trust and IndiGrid Infrastructure Trust from the power sector; Embassy REIT, Mindspace Business Parks REIT, Brookfield India Real Estate Trust, and Nexus Select Trust from commercial real estate; and IRB InvIT specializing in highway infrastructure. Combined, these trusts have a market capitalization around ₹1.6 lakh crore, indicating a growing but still nascent segment.

How These Trusts Operate

At the foundation of InvITs and REITs is a trust structure holding stakes in Special Purpose Vehicles (SPVs). These SPVs own income-generating infrastructure assets such as power transmission lines, toll roads, IT parks, office complexes, and malls. Investors purchase units of the trust, similar to buying shares in a company, becoming unitholders entitled to periodic income distributions.

The core appeal lies in their ability to provide steady, annuity-like cash flows. Earnings originate from SPVs’ operating cash flows after necessary maintenance capital expenditure. These net distributable cash flows (NDCF) flow from SPVs to the trust and then to unitholders as distributions, akin to dividends. SEBI mandates that SPVs distribute at least 90 percent of their NDCF to trusts, which in turn must distribute 90 percent of their NDCF to unitholders, ensuring consistent payouts.

Why InvITs and REITs Matter

Infrastructure development demands substantial upfront capital, often funded by debt. While assets like office buildings, highways, and power grids generate revenues over decades, the initial investment recovery is slow. This can restrict companies from launching new projects, especially if their balance sheets are already leveraged.

The REIT and InvIT model enables these developers to monetize completed, revenue-generating assets by transferring them to a trust. The trust raises funds by issuing units to investors, who then benefit from the assets’ steady income streams without direct exposure to the developer's operational risks.

This setup also appeals to investors seeking predictable income rather than the higher volatility of direct equity investments in infrastructure firms. The structured distributions and regulatory safeguards create a more stable investment option.

Key Regulations and Financial Mechanics

SEBI regulations require trusts to hold at least 80 percent of their assets in completed, revenue-generating projects. The net debt of REITs cannot exceed 49 percent of asset value, while InvITs have a threshold of 70 percent. Trusts must publish net asset values (NAVs) twice yearly using external valuations.

Trusts may borrow funds or issue new units to acquire additional assets and sustain growth. The objective is to enhance NDCF and NAV by acquiring assets with returns exceeding borrowing costs. Currently, the trusts analyzed have ample headroom to raise debt within regulatory limits.

A Hybrid Investment Class

REITs and InvITs blend features of both equity and debt. Their recurring income distributions resemble debt interest payments, while ownership units represent equity claims on net assets. Investors earn returns through both yield from distributions and capital appreciation from unit price changes.

Performance Snapshot

The group includes four REITs managing commercial real estate such as office spaces, IT parks, malls, and hotels leased to established brands, two power sector InvITs, and one highway InvIT. Across these trusts, the combination of stable rental or toll revenues and regulated distribution policies has resulted in attractive returns, often exceeding inflation and standard fixed income products.

As India’s infrastructure and real estate sectors continue to mature, InvITs and REITs offer investors an alternative path to benefit from these long-duration assets. Their evolving market presence signals growing acceptance of asset-backed trusts as a complementary investment option alongside traditional equity and debt instruments.