Why Invest In Infrastructure Bonds?

We are in the midst of a series of interconnected and mutually reinforcing crises. Some, like COVID-19 and the ensuing recession and huge unemployment, happen out of nowhere, like a cliff fall.

Others, such as droughts, floods, fires, sea level rise, severe storms, and mass extinctions brought on by climate change, are happening slowly, like a frog in a pot, or quickly, like a punch to the gut.

The COVID-19 and climate crises are both exacerbated by the infrastructure problem, which saps our potential to be resilient. Roads, bridges, and tunnels, water and energy infrastructures, mobility and transit projects, levees and sea walls, and communications networks, as well as schools, hospitals, and public and private buildings, are all threats and damage multipliers. Better infrastructure can help mitigate and manage the effects of natural disasters, as well as create jobs and alleviate structural racism and inequality.

The difficulty is that infrastructure has a high sticker price, and we pay for it mostly through taxes and fees. However, due to the COVID shutdown and subsequent recession, there are even fewer taxes and fees available for infrastructure at the local level, creating an unsustainable loop.

The Qualified Infrastructure Bond Program is a key part of the bill that would enable cheaper funding for infrastructure projects around the country (“QIB”). QIBs are taxable municipal bonds in which the federal government pays the municipal issuer a direct interest subsidy rather than tax-exempt interest. This will help keep infrastructure project finance costs low across the country.

The federal government helps to local infrastructure by exempting interest income from taxation on municipal bonds issued by state and local governments for infrastructure. As a result, the bond issuer offers the investor a lower interest rate, or “yield,” and the local government saves money on interest payments. The federal government lowers the cost of municipal infrastructure by eliminating the interest tax.

However, the federal subsidy offered by making interest on municipal bonds tax-exempt has a substantial disadvantage: it only benefits investors who would otherwise pay tax on the interest income. Tax-exempt investors, such as pension funds, university endowments, and private foundations, are normally excluded from paying taxes on interest received on their investments. Similarly, overseas investors who receive interest on U.S. bonds are generally not taxed. Bringing these investors into the muni market would deliver a much-needed infusion of new capital into the United States’ infrastructure.

The Moving Forward Act provides a solution to this problem. It would distribute the federal interest rate subsidies in a different way, allowing a far bigger group of investors to invest in municipal bonds. The initial Build America Bonds program, which was established as part of the financial crisis stimulus bill, the American Recovery and Reinvestment Act of 2009, took this strategy (ARRA). The BAB program allowed towns to issue taxable bonds and receive a direct federal subsidy equal to 35% of the bonds’ interest payments. As a result, the issuer’s net interest expense was 65 percent of the taxable bond rate, which was close to the tax-exempt bond rate.

The BAB initiative was a huge success. Approximately $181 billion in municipal bonds were issued under the program from April 2009 to December 2010, accounting for almost one-third of the issuance of new long-term municipal bonds during that time period. Each of the 50 states as well as the District of Columbia issued 2,275 different bond issues. Treasury calculated that issuers saved about 84 basis points on 30-year bonds and significant savings on shorter maturities, owing to the fact that BABs attracted to a bigger market of investors than traditional tax-exempt bonds because they were taxable.

  • Second, it has higher subsidies in the beginning—42 percent from 2020 to 2024, then 40 percent from 2024 to 2026, before stabilizing at 30% from 2027. This is critical in light of the current economic downturn.
  • Third, if the subsidy is decreased as a result of sequestration, the statute requires that the issuers be made whole (“grossed up”) to compensate for the losses.

However, there is one essential and timely aspect of the new initiative that has been overlooked.

If there’s one thing COVID-19 and climate change have taught us, it’s that not all infrastructure is made equal.

A health-care system that can cope with a spike in cases during a pandemic is preferable to one that can’t.

Teachers and students who have access to high-speed, low-cost internet have a better chance of effectively teaching and learning. Those who don’t most likely don’t.

Extreme heat and cold are too much for poorly built buildings to handle. Communities with unprotected shorelines are vulnerable to deadly storms.

During a pandemic, a bus and subway system that cannot minimize the spread of airborne viruses will be unable to function.

To remedy this, the Moving Forward Act should provide additional incentives for bonds that clearly demonstrate that they are cutting emissions, building resilience, and safeguarding our most vulnerable communities (dubbed “Build Back Better Bonds” or “B4s”). The burgeoning green and sustainable bond market demonstrates that these types of investments are in high demand.

Because these projects create jobs and reduce pollution while saving money, property, and lives, this special treatment would be more than warranted.

What are the advantages of purchasing infrastructure bonds?

When it comes to tax-advantaged investments, infrastructure bonds are among the best. These bonds are issued by infrastructure businesses after they have been approved by the government. The bonds’ tax benefits, as well as their attractive interest rates, have led to their growing popularity among investors. Infrastructure bonds qualify for income tax deductions up to Rs.20,000 under Section 80C of the Income Tax Act, although the ceiling is higher than the Rs.1 lacs deduction that individuals can claim under Section 80C because they are long-term secured bonds that expire in 10 to 15 years.

PFC and IFCI Ltd. have just stopped issuing infrastructure bonds, while others, such as L&T Infrastructure, LIC, India Infrastructure Finance Company, and Infrastructure Development Finance Company, are preparing to do so.

People invest in infrastructure for a variety of reasons.

They may also put money into contracts for extended periods of time, which helps investors create revenue and profits. This income is frequently linked to inflation, so its value isn’t undermined by rising living costs. Infrastructure investments are usually good at providing some inflation protection.

Is it a smart idea to put money into infrastructure funds?

Infrastructure investments are critical for every rising economy’s future growth. High-quality infrastructure, such as good roads, highways, inland waterways, ports, and airports, is expected to improve GDP growth by 1.5-2.0 percent every year. In real terms, this means India’s yearly GDP growth may jump from 7% to 8.5 percent. The miracle economies of Southeast Asia, such as Hong Kong, Singapore, Taiwan, and later China, grew as a result of high-quality infrastructure investments. To catch up with Asian peers, India will need to invest about $1 trillion in infrastructure projects. Who is not only a tremendous investment, but also a huge potential for infrastructure businesses, particularly those that operate toll roads, build motorways, bridges, and ports, and install power plants, among other things.

An infrastructure fund is a mutual fund that aims to capitalize on this particular area in order to maximize the benefits of infrastructure growth. In India, infrastructure investments can be postponed but not ignored. For infrastructure funds, this is the best bet. So, should infrastructure funds be a big consideration? Should you invest in infrastructure funds, and why should you do so in the first place?

Infrastructure funds, which have benefited from the rise of the infrastructure industry, have been one of the top outperformers in recent years. The table below lists some of India’s largest infrastructure funds, each with an AUM of more than Rs.1000 crore. Over the long term, it is clear that the majority of infrastructure funds have outperformed.

Name of the Fund1-Year Returns

Returns after two years

Returns after three years

Returns after 5 Years

Reliance Diversified Power Fund is a mutual fund that invests in a variety of

13.7% of the population

UTI Infrastructure Fund had a 28.7% 16.6% 18.2% return.

6.7 percentage point

9.3%, 19.9%, 19.9%, 19.9%, 19.9%, 19.9%, 19.

ICICI Pru Infra Fund ICICI Pru Infra Fund ICICI Pru Infra Fund ICICI Pru

19.3 percent 9.5 percent 9.5 percent 9.5 percent 9.5 percent 9.5 percent

8.8% of the population

L&T Infrastructural Fund, 15.8%

19.4 percentage point

18.9%, 31.9 percent, 31.9 percent, 31.9 percent, 31.9 percent,

24.7 percentage point

Tiger Fund DSP Blackrock

10% of the population

HDFC Infrastruct. Fund 22.7 percent 12.3 percent 18.4 percent

15.4 percent 3.7 percent 3.7 percent 3.7 percent 3.7 percent 3.7 percent

14.5 percent, 6.1 percent, 6.1 percent, 6.1 percent, 6.1 percent

As a result, the big question is whether it’s time to invest in infrastructure funds for the next 8-10 years.

1.Infrastructure projects share two characteristics: they take a long time to complete and are heavily reliant on government oversight. As a result, if you want to see a reasonable return on your infrastructure investment, you need look at a time frame of 7-8 years. That’s the kind of time range you’ll need for your infrastructure fund to outperform the market.

2.Infrastructure funds are thematic funds, thus they can best be used to supplement your core equity exposure in diversified stock mutual funds. Keep your infrastructure-themed fund exposure to roughly 10-15% of your whole equity portfolio, and don’t let your exposure to a single topic exceed that. You should still consider it in the context of your overall financial planning.

3.There is a significant disconnect between potential and actual performance. Although the infrastructure sector presents a significant opportunity, not all infrastructure firms will be profitable and create shareholder returns. You’ll need a fund that can spot these companies quickly and wager on them. That’s where the fund’s track record of returns comes into play, and it may be a useful tool for investors looking to invest in the fund.

4.Infrastructure is a volatile industry by definition, so the returns on the infrastructure sector fund will be erratic as well. As a result, taking a staged approach to investing is the greatest way to take advantage of this volatility. Do a systematic investment plan (SIP) on these infrastructure funds, ideally, so that the volatility works in your favor over time and your cost of holding is significantly reduced.

5.Take a comprehensive approach to infrastructure. When creating a financial plan, you invest in both equity and debt funds to meet your wealth growth and regular income goals. When calculating your infrastructure risk, add up your equity and debt exposures to get a holistic picture of your portfolio’s infrastructure risk. To reduce thematic risk, set an upper limit on your overall infrastructure exposure.

6.When it comes to infrastructure, there are numerous ways to gain exposure to the industry. Infrastructure-focused equity funds are available for purchase. You can also invest in infrastructure by purchasing tax saving and tax rebate bonds. In post-tax terms, these are highly appealing. Finally, there are new options in the form of InvITs (Infrastructure Investment Trusts), which are infrastructure investments that are both quasi debt and quasi equity. The amount of infrastructure exposed as a result of all of these ways can be pretty astonishing. After you’ve considered all of your options, make a comparison.

What is the purpose of an infrastructure bond?

Bond financing is a sort of long-term borrowing that is widely used by state and local governments to raise funds, mainly for long-term infrastructure assets. This money is obtained by selling bonds to investors. In exchange, they agree to repay the funds, plus interest, according to predetermined timelines.

Is infrastructure bond income taxable?

As a result, the tax-advantaged long-term infrastructure bonds were not really tax-free bonds.

The annual interest payout option and the cumulative interest option were both available to the investors.

While investors who chose annual interest distributions have already paid tax on the amount of interest received, those who chose the cumulative option would pay more tax in the year of investment than they saved in the year of investment.

Confusion over Tax-Saving vs. Tax-Paying Infrastructure Bonds

Taxpayers who take advantage of free bonds end up paying more in taxes than they receive in benefits.

Taxation

Because the interest on long-term infrastructure bonds is taxable, the interest earned by the investors – annually for those who chose the annual option and aggregate on maturity for those who chose the cumulative option – will be added to their taxable income.

As a result, tax payable will be lower for investors in lower tax bands and higher for those in higher tax brackets.

TDS

For Resident taxpayers who choose the cumulative option in physical format, the interest payment will be subject to a 10% Tax Deducted at Source (TDS) if the interest payment upon redemption exceeds Rs 5,000.

The TDS rate will increase to 20% if the bondholder does not have a valid PAN or if the investor has not submitted his tax returns for the last two years and the total TDS and TCS in each of those years is Rs 50,000 or higher.

TDS of 31.2 percent would be applied to interest payouts for non-resident taxpayers.

How to save TDS

Resident bondholders must submit Form 15G / 15H, as appropriate, to avoid TDS. Those who did not disclose their PAN data at the time of investment must update their PANs with the various RTAs within the time frames set by the bond issuers.

Non-Resident bondholders must submit a tax officer’s order under Section 197 / 195 setting NIL / lower TDS rates to the appropriate RTAs before the deadline to guarantee that TDS is collected at the rates provided in the order.

What are the two advantages of foreign direct investment?

When a person or a firm owns at least 10% of a foreign company, it is called foreign direct investment (FDI). The International Monetary Fund (IMF) classifies it as part of a stock portfolio when investors possess less than 10%. While a 10% ownership stake in a foreign firm does not give an individual investor control, it does offer them influence on the company’s management, operations, and overall policy.

For developing and emerging market countries, FDI is crucial. Developing-country businesses require global finance and skills in order to expand, structure, and guide their worldwide sales. To boost jobs and incomes, these international enterprises require private investments in infrastructure, electricity, and water.

  • What will happen in 2021 if global foreign direct investment falls by more than 40%?

There are different levels of FDI depending on the companies involved and the rationale for the investments. An FDI investor could buy a company in the target country through a merger or acquisition, start a new venture, or extend the operations of an existing one. Acquisition of shares in a related enterprise, establishment of a wholly-owned company, and participation in an equity joint venture across international borders are all examples of FDI.

Investors considering any sort of FDI should carefully consider the benefits and drawbacks of the investment.

Advantages of foreign direct investment:

The most obvious benefit of FDI is the creation of jobs, which is one of the main reasons why a country (particularly a developing one) will seek to attract foreign direct investment. FDI stimulates the manufacturing and service sectors, resulting in the creation of jobs and a reduction in the country’s unemployment rate. Increased employment leads to better wages and more purchasing power for the populace, strengthening a country’s overall economy.

Human capital refers to a workforce’s knowledge and skills. Employees’ skills gained via training and experience can help a country’s education and human capital. It can train human resources in other areas and firms as a result of the ripple effect.

Targeted countries and businesses gain access to the most cutting-edge financial instruments, technology, and operating practices from around the globe. The introduction of newer and improved technologies results in a company’s dissemination into the local economy, resulting in an increase in the industry’s efficiency and effectiveness.

Many FDI-produced commodities are exported rather than consumed domestically. The establishment of 100 percent export-oriented businesses aids foreign direct investment (FDI) investors in increasing exports from other countries.

The inflow of FDI into a country translates into a steady flow of foreign exchange, assisting the Central Bank in maintaining a healthy foreign exchange reserve, resulting in stable exchange rates.

Financial inflows are especially favorable to countries with limited domestic resources and limited alternatives to raise funds on international capital markets.

Foreign direct investment (FDI) helps to promote a competitive environment and destroy domestic monopolies by making it easier for foreign companies to enter the domestic market. A robust competitive environment encourages businesses to improve their processes and product offerings on a regular basis, supporting innovation. Consumers will now have access to a greater selection of products at lower prices.

The United Nations has also supported the use of foreign direct investment (FDI) to tackle climate change around the world.

Disadvantages of foreign direct investment:

FDI can sometimes stifle domestic investment. As a result of FDI, domestic companies begin to lose interest in investing in their own products.

Political movements in other nations can be volatile, posing a risk to investors.

Foreign direct investments can occasionally influence exchange rates in one country’s favor and at the other’s disadvantage.

When investors make investments in foreign countries, they may realize that the cost of items is higher than when they are exported. More money is frequently spent on machinery and intellectual property than on wages for local workers.

Because foreign direct investments might be capital-intensive from the investor’s perspective, they can be hazardous or economically unviable at times.

Expropriation might occur as a result of frequent political transitions. In this event, the governments of those countries will have power over the property and assets of investors.

Many third-world countries, or at least those with a colonial history, are concerned that foreign direct investment may lead to a form of modern-day economic colonialism, exposing host countries to foreign firms’ exploitation.

Multinational corporations have been chastised for the bad working conditions in their overseas facilities.

What does infrastructure investment imply?

Infrastructure investments are a type of “real asset” that includes physical assets such as bridges, roads, motorways, sewage systems, and energy. This type of asset is extremely important for a country’s development. Infrastructure is frequently invested in because it is non-cyclical and provides stable and predictable free cash flows.

Financial Characteristics of Infrastructure

After studying about infrastructure, you may wonder why you should invest in infrastructure rather than public firms. The explanation boils down to infrastructure’s appealing financial attributes.

Stable and steady cash flows

One of the most appealing aspects of infrastructure is the promise for consistent cash flows. Given that the asset frequently comes with a regulated and contracted revenue model, it generates consistent and predictable cash flows.

For example, a newly constructed sewage system could come with a ten-year government contract. So, unless the government becomes bankrupt (which is a remote possibility),

What is the process of infrastructure investment?

Infrastructure can be described as any’real asset,’ such as energy, roads, bridges, or anything else that aids in the construction and maintenance of civilization. Historically, infrastructure was either subsidized by the government or farmed out to large corporations who profited solely from it. Many people are getting exposure to infrastructure through hedge funds now, in the age of infrastructure investing. Infrastructure is being purchased by private equity groups as well. Simply put, infrastructure investing is when firms and funds invest their money in new and existing infrastructure with the goal of making a profit.

What is an infrastructure investment trust, and how does it work?

Simply described, an infrastructure investment trust is a pooled investment instrument similar to a mutual fund. Unlike mutual funds, which invest in financial instruments, an InvIT invests in real infrastructure assets such as roads, power plants, transmission lines, and pipelines.