How to Safely Boost Yields: Exploring Hybrid Investments vs. Traditional FDs for Conservative Investors

As an investor, you want good returns and little to no risk. So what are your options when you want to protect your capital and yet earn over the risk-free rate? You go yield hunting. The yields are high everywhere these days. But then there are some names that stand out in this mayhem.

If you are in India, a correctly set up Fixed Deposit earns around 7.1%. The reason we say 7.1% is because of the weird maturity terms and the corresponding yields set up by the banks. It could be partially due to the yield curve itself and partially just to trick the investors. In any case, as a conservative investor, do you have other options to enhance your yield?

Just think about this, what if you can earn 200 bps over government bonds over a 10-year period. You are talking about 40% in total excess return. A careful investor will look at the proper screens to discover these instruments. But do stocks ever provide this kind of dividend yield? If the dividend yield of a stock is over 7-8%, then there's certainly something wrong with the firm. The dividend is probably not sustainable for much longer or the company is soon to file for bankruptcy.

But what if there are a few Hybrid products that actually might be able to generate a higher yield for a much longer sustainable period? You should grab on to these and hold on to these for your dear life. Some such names are what we discuss below. Let’s understand some of these products a little better.

Hybrid Investment Products

Consider these hybrid investment products for potential high yields and diverse investment opportunities:

Infrastructure Investment Trusts (InvITs)

InvITs operate like mutual funds and focus on infrastructure projects such as roads, power plants, and airports. They are known for their potential to provide high yields, as these projects typically generate stable cash flows.

Real Estate Investment Trusts (REITs)

REITs function similarly to InvITs but invest in real estate assets like office buildings, hotels, and shopping malls. They offer the potential for attractive yields, often derived from reliable rent payments by tenants.

Liquid Funds

Liquid funds are short-term debt funds that primarily invest in money market instruments. While they may offer lower yields compared to other hybrid products, they are generally considered less risky. You should look at these instruments to park your money in the short term and yet earn a decent yield. Now, let’s look at a few companies that are our favorites.

• IndiGrid: IndiGrid is a company with a unique setup. Most of its contracts have a remaining life of 30 years, and the company is very confident of maintaining the dividends for the next 10 years at least. The company has consistently increased the dividend by 3-5% every year and currently yields 10.5%. In addition to this, the company has a very dynamic management team.
• IRBINVIT: IRBINVIT had its ups and downs because of two of its deals in Gujarat, including Surat-Dahisar expiring in the last year and the impact of COVID where the government unilaterally decided to stop toll collection. The farmer’s strike in Amritsar added to the misery. There was also a sand mining ban in Rajasthan which led to further decrease in road traffic. But all this seems to be out of the way, and the company also bagged a new HAM contract from the government on the prestigious Mumbai-Delhi expressway. This INVIT still has a current yield of 11.5%.
• PGINVIT: PGINVIT is an INVIT launched by Powergrid, one of the navaratnas of the Indian government. This has a consistent 12 rs per year dividend from the time it was launched two years back. However, there’s no visibility on new deals coming in or the parent company offloading any more long-term contracts. Although this visibility is missing, the dividend is fairly secure with the current contracts, and hence a small percentage can be invested in this name. The current yield is close to 10.8%.
• Embassy: Embassy is a marquee name backed by Blackstone. They have some of the most prestigious long-term business leases in Bangalore and other metros in India. This stock is currently trading near its IPO price and is yielding close to 7%. This is fairly high for REIT unless there’s a real chance of leases going down. Given the trend in back to office among most corporates, given that India is on the cusp of its next leg of long-term growth, this is a very remote possibility. The current dividends are similar to where they started about four years back. But we think we might have hit the trough.
• BIRET: BIRET is a similar instrument as EMBASSY REIT but with a more concentrated portfolio mainly in Mumbai and Noida. With strong backing from Brookfield and a high yield of almost 6.5%, we believe this might be the dark horse you bet on for the long term.

With this asset breakdown, the conservative investor could put the rest of the money in Liquid funds that yield anywhere between 6.5% and 7%.

Now let’s look at an asset mix that we think is appropriate given the nature of each instrument and the risks involved.

From a 7.1% yielding FD portfolio, we have created a relatively low-risk portfolio that yields 9.0%, a good 200 bps above treasuries.

Portfolio Advantages

• Relatively Stable Yield: These portfolios offer a stable yield, and you receive dividends every quarter.
• Long-term Contracts: The portfolios consist of long-term contracts, allowing you to buy and hold them over an extended period.
• Potential for Upside: There's potential for upside in various scenarios, including:
  • Increased Toll Collection: A macro bet on improving the Indian economy with higher highway usage.
  • Increase in Utility Utilization: Better energy management and higher utility collections.
  • Increase in Commercial Real Estate Prices: Particularly in large urban areas within the country.
• Safety and Liquidity: These portfolios provide safety and liquidity through Liquid funds.

Potential Risks

On the flip side, there are potential risks to consider:

• Macro Headwinds: Factors such as newer and better roads created parallel to existing ones might reduce the tolls on these roads.
• Grid Failures and Policy Changes: Grid failures and changes in government policies could impact utility markets.
• Back to Office Uncertainty: If the return to office doesn't materialize as expected, it could lead to a glut in commercial real estate and lower rentals.

If you are considering investing in InvITs and REITs, here are some things to keep in mind:

• Choose instruments that invest in assets that you understand and are familiar with.
• Look for instruments with a strong track record of dividend payments.
• Consider the risk appetite and investment goals of your portfolio.
• Do your own research and speak to a financial advisor before making any investment.

Thank you for reading!