Is Now the Time to Shift from Direct REITs to Mutual Funds?

Real Estate Investment Trusts (REITs) allow individuals to invest in units of income-generating assets like offices, shopping malls, and warehouses. They are listed on the stock exchange, offering liquidity and the possibility to earn dividends from rental income. For investors who want direct exposure to real estate without buying property, REITs provide a clear, regulated entry into India's growing commercial realty sector.

Mutual funds, particularly real estate or hybrid schemes, are gaining traction because they allow diversification outside the ambit of a single industry. Although REITs are highly dependent on rents and property cycles, mutual funds spread the risk between equities, debt, and even real estate exposure in some instances. In today's uncertain environment, with commercial leasing under pressure and interest rates at a high, mutual funds can provide more stability through professional management and lower dependence on property cycles.

Tax rules also apply with the decision. REIT dividends are typically taxed in the shareholder's hands, and there are specific holding period requirements for capital gains on selling units. Mutual funds, however, have more structured tax treatment based on whether they are debt or equity oriented. For individuals in higher tax brackets, shifting some of their ownership from direct REITs into mutual funds could realize better after-tax returns.

Whether to switch or not depends on your investment horizon and expectations of the market. REITs still have potential for stable rental return as India's office space rebuilds, but mutual funds provide diversification at a time when interest rate volatility and regulatory change affect REIT performance. Rather than an exit, selective exposure—retaining some exposure to REITs but adding mutual funds—can strike a balance between risk and capturing opportunities across assets.