SEBI Reclassifies REITs as Equity Instruments: What It Means for Your Mutual Fund Portfolio

In a significant move to enhance participation in India’s growing real estate investment market, the Securities and Exchange Board of India (SEBI) has reclassified Real Estate Investment Trusts (REITs) as equity-related instruments for mutual funds and Specialized Investment Funds (SIFs). This change, effective from January 1, 2026, follows a gazette notification issued on October 31, 2025.

The market regulator believes this step will make it easier for funds to invest in REITs, especially as investor interest in real estate-backed securities continues to rise. Previously, REITs were not classified as equity instruments, which limited their inclusion in certain fund categories.

With the reclassification, any investment made by mutual funds and SIFs in REITs from 2026 onwards will now be treated like an equity investment. This could potentially increase exposure to real estate assets across equity-oriented schemes. However, it's important to note that Infrastructure Investment Trusts (InvITs) will continue to be classified as hybrid instruments, meaning only REITs receive the upgraded equity status.

Existing REIT holdings within debt schemes as of December 31, 2025, will be grandfathered, meaning they won’t need to be immediately sold. However, SEBI has encouraged mutual fund houses (Asset Management Companies, or AMCs) to gradually divest these REIT units from debt schemes, taking into account investor interest, liquidity, and market conditions. The industry body, the Association of Mutual Funds in India (AMFI), has also been directed to update its scrip classification list to include REITs based on their market capitalization.

To reflect the new classification, AMCs will issue addendums to update scheme documents. SEBI has clarified that this will not be treated as a “fundamental attribute” change, meaning investors won’t face any mandatory exit window or consent requirements. Additionally, SEBI has specified that REITs can be added to equity indices only after July 1, 2026, providing a six-month buffer to allow the market to adjust to the new framework.

The regulatory changes also include tweaks to certain thresholds. Mutual funds can now hold up to 15% of REIT units issued by a single issuer, aligning with existing limits on equity ownership. Corresponding limits for SIFs have been adjusted to ensure that combined holdings of mutual funds and SIFs in a single REIT remain within defined boundaries. The regulator stated that these changes are aimed at protecting investor interest and promoting the orderly development of the securities market.

For investors, this move could mean a higher exposure to real estate assets within their equity-oriented mutual fund portfolios. It may also lead to more diversified investment opportunities and potentially higher returns, given the growth potential of the real estate sector. However, investors should remain cautious and consider their risk tolerance and investment goals before making any significant changes to their portfolios.

The reclassification of REITs as equity instruments is a significant step forward for the Indian real estate market. It not only aligns with international best practices but also paves the way for greater institutional and retail participation in real estate investments. As the market adjusts to these changes, it will be interesting to see how this impacts the overall investment landscape in India.