Mutual Funds to Invest in REITs as Equity from January 1, 2026: Key Points for Investors

The Securities and Exchange Board of India (SEBI) has made a significant decision that will impact the investment landscape for mutual funds and Specialized Investment Funds (SIFs). Starting from January 1, 2026, REITs will be reclassified as equity-related instruments for investments by mutual funds and SIFs. This change is expected to enhance the participation of these funds in REITs, providing investors with new opportunities and diversification.

However, Infrastructure Investment Trusts (InvITs) will continue to be treated as hybrid instruments for investments by mutual funds and SIFs. This distinction is crucial for understanding the implications of SEBI's decision.

But what does this move mean for investors? Here are five key points to consider:

What does SEBI's move mean for investors?

SEBI's decision aims to increase the participation of mutual funds and SIFs in REITs. Currently, equity mutual funds are required to invest a minimum of 65% of their assets in equity or equity-related instruments. Many equity funds exceed this threshold, allocating a larger portion of their portfolio to equity.

From January 1, 2026, equity mutual funds will be able to allocate a higher percentage of their portfolio to REITs, potentially altering their portfolio diversification and risk management strategies. For mutual fund investors, this means indirect exposure to real estate assets, which can be a valuable addition to a diversified investment portfolio. However, it is important to note that this could also impact returns, and investors should carefully consider the potential risks and benefits.

The reclassification of REITs as equity may also lead to the introduction of REIT-focused equity mutual funds and exchange-traded funds (ETFs) in the near future. However, the actual impact of this decision will depend on how the market responds and evolves.

What happens to existing investments in REITs by mutual funds?

SEBI has outlined that existing investments in REITs held by debt schemes of mutual funds and investment strategies of SIFs as of December 31, 2025, will be grandfathered. This means that these investments will not be immediately affected by the reclassification. However, SEBI has directed Asset Management Companies (AMCs) to make efforts to divest REITs from their respective portfolios of debt schemes, considering market conditions, liquidity, and investor interests.

How will REITs be classified?

SEBI has instructed the Association of Mutual Funds in India (AMFI) to include REITs in the list of classification of scrips based on their market capitalization. Mutual Fund AMCs will also issue an addendum to make the necessary changes in the scheme documents. These changes will not be considered a fundamental attribute change for the scheme, ensuring a smoother transition for investors.

Will REITs be included in equity indices?

Yes, REITs will be eligible for inclusion in equity indices starting from July 1, 2026. This inclusion can further enhance the visibility and attractiveness of REITs to a broader range of investors, potentially leading to increased liquidity and market participation.

A brief history of listed REITs in India

India's journey with REITs began in 2019 with the launch of the first REIT IPO, the Embassy Office Parks REIT. This was followed by the listing of Mindspace REIT in 2020, Brookfield REIT in 2021, Nexus Select Trust REIT in 2023, and KRT REIT in 2025. In just six years, the market cap of REITs in India has surpassed several mature global markets.

According to a report by Anarock Research, only 32% (166 million sq. ft.) of the 520 million sq. ft. REIT-worthy office stock across the top seven cities is listed under the three REITs — Embassy Office Parks, Mindspace Business Parks, and Brookfield India & Knowledge Realty. This leaves a vast growth potential, particularly in cities like Bengaluru, Hyderabad, and Chennai, which hold 313 million sq. ft. of this stock, with only 31% currently listed.

Conclusion

SEBI's decision to reclassify REITs as equity-related instruments for mutual funds and SIFs is a significant step that could reshape the investment landscape. For investors, this means new opportunities to gain exposure to real estate assets through mutual funds. However, it is essential to carefully evaluate the potential risks and benefits and consider the broader market context before making investment decisions.