Infrastructure debt fund has changed over the years. It is now offering investors new opportunities for gaining exposure. As global funding needs have increased, commercial banks are now not allowed to hold long-term debts. Institutional investors who are also into CFD stock trading have noticed it. And they are considering infrastructure debt to adjust risk, diversify their portfolio and to increase their cash flow.
What is Infrastructure Debt Fund?
So what is infrastructure debt fund? It acts as a vehicle for refinancing the existing debt of an Infrastructure company. It creates a fresh headroom for the bank and they are able to lend more for infrastructure projects.
No wonder lots of investors invest in the financing of various Infrastructure projects. All projects require certain amount of debt fund. One reason is that they offer secure cash flow and they are not really influenced by the economic conditions. Bonds and equities, on the other hand, are the type of assets that are directly correlated to the economic conditions.
Equity and debt, both finance the Infrastructure assets. The debt is actually a predominant aspect of financing. Infrastructure debt is more like private debt. You can expect to get superior yields and it’s a great option if you are looking for some diversification. It also has monopolistic traits. It offers greater security as compared to bonds and other corporate loans.
Another great trait of Infrastructure debt is that you can monitor risk very closely. If there are certain indicators which suggest the project is failing or repaying the debt will be difficult, the borrower has certain rights that protect him. For example, he can stop the withdrawals from their reserve account, limit borrowing or even hold the dividends. A very small percentage of such loans hence default. And even if they do, the outcome is mostly favorable. Lenders are able to recover 100 percent of their loans most of the times. Overall, the chances of losing your money are low. The risk is lower as compared to that involved in investing in a bond or any other traditional asset.
Typically, Infrastructure debt fund is meant to finance a project. And if you are wondering what does infrastructure means, every investor has own definition for that. The assets which investors favor are usually monopolistic and their demand is inelastic. They offer predictable cash flows and they are not really affected by the economic downturn. Different investors have different interpretations for the assets that fit their criteria. Hence, the risk differs.
Benefits of Infrastructure Debt Fund
So how does an Infrastructure debt fund serve you? Let’s look at some of its benefits to understand:
- Easy access to cash flow: The debt is repaid from the cash flow of the project. So, if you are an investor who is looking for predictable cash flows over the course of years, this type of fund is best for you.
- Less chances of default: Like discussed above, the chances of default are limited. The transactions are structured carefully to prioritize the debt payment.
- Tool for diversification: The whole idea to diversify your portfolio is to spread the risk. Infrastructure Debt Fund is less risky as compared to corporate bonds and other assets.
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A Solution to Diversify Your Bond Portfolio
Speaking of diversification, let’s have a deeper look at how this fund helps with portfolio diversification. You might already agree that bond yields are reducing over time. If you have been looking for some other low-risk and higher return investment, infrastructure debt fund deserves your attention. It is a better alternative to diversify your portfolio rather than just going for bonds.
How does it diversify your portfolio? Well, it has a long economic life. The elasticity of demand is usually low. And best of all, you can expect stable and predictable cash flows. Did you know that this debt can reduce the volatility of your credit portfolio, too? Why? Because it has better chances of recovery as compared to corporate bonds and it’s less volatile.
Are There Any Risks?
Nothing good in this world is free. And you have guessed it right. Infrastructure debt fund is not all that good. It has some risks associated with it. Let’s throw some light on them, shall we?
- Lack of liquidity
Mostly, the debt as well as the debt security acquired by the investor, are not liquid. You cannot sell them at the time of need. Even if you are able to sell them, loss is inevitable. However, you can protect yourself. For that, it is only recommended to invest in the infrastructure debt fund if you want to buy and hold.
- Repayment risk
Sometimes, the issuer repays the capital before the deadline of the contract. In order to prevent that, you can impose early repayment penalties at the time of preparing the contract.
- Downgrade rating
Even though the risk of default is lower, it still exists. Chances are the firms (the issuers) are not able to meet the debt repayment. There is a solution to that, too. You can anticipate and resolve the difficulties with the help of protections. It is therefore recommended to evaluate the financial strength of the issuer to avoid such problems, to begin with.
- Interest rate
The value of the investment depends on the level of the interest rate.
It may be a nice strategy to consider investing in the Infrastructure debt fund. But before you do that, study it carefully. If you can’t seem to understand it, stick to live trading only.