Why Mutual Fund Investments in REITs and InvITs May Remain Low

The investment landscape for Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) has seen limited enthusiasm from mutual fund managers. Despite the potential for high returns, several factors are inhibiting significant investment in these sectors.

Mutual fund managers are typically cautious when it comes to allocating funds to new and relatively untested investment vehicles. REITs and InvITs, while promising, have not yet established a robust track record in the Indian market. This caution is further compounded by the stringent regulatory frameworks governing these trusts. The Securities and Exchange Board of India (SEBI) has imposed numerous guidelines to ensure transparency and protect investors, but these regulations can also create a barrier to entry for mutual funds.

One of the primary concerns for mutual fund managers is the liquidity risk associated with REITs and InvITs. Unlike traditional equities, these trusts may not have a deep and liquid secondary market, making it difficult for funds to enter or exit positions without significantly impacting the market price. This liquidity concern is particularly relevant in a country like India, where the REIT and InvIT markets are still in their nascent stages.

Another factor is the performance track record of REITs and InvITs. While some of these trusts have shown promising returns, the overall track record is still limited compared to more established investment options. Mutual fund managers are often beholden to their performance benchmarks and may be hesitant to allocate a significant portion of their portfolios to assets with an unproven track record.

The valuation of REITs and InvITs also poses a challenge. These trusts are often priced based on the underlying assets they hold, such as commercial real estate or infrastructure projects. Valuing these assets accurately can be complex and may vary widely depending on market conditions and the quality of the underlying assets. Mutual fund managers must be confident in the valuation methods used to ensure that they are not overpaying for these investments.

Furthermore, the regulatory landscape for REITs and InvITs is still evolving. SEBI continues to refine the rules and regulations governing these trusts, which can create uncertainty for investors. Mutual fund managers are typically risk-averse and may prefer to wait for the regulatory framework to stabilize before making significant investments.

Despite these challenges, there is still potential for mutual funds to gradually increase their investments in REITs and InvITs. As the market matures and more data becomes available, the perceived risks may diminish. Additionally, the growing demand for passive investment products, such as index funds and ETFs, could provide a tailwind for REITs and InvITs, which are often included in broader real estate and infrastructure indices.

In conclusion, while the potential returns from REITs and InvITs are attractive, mutual fund managers are likely to remain cautious in their investment strategies. The liquidity concerns, limited performance track record, valuation challenges, and evolving regulatory landscape are all factors that are likely to keep mutual fund investments in these trusts relatively low in the near term. However, as the market develops, the situation may change, and mutual funds may become more willing to allocate a larger portion of their portfolios to these innovative investment vehicles.

For investors looking to gain exposure to the real estate and infrastructure sectors, it may be worth considering other investment vehicles, such as direct investments in real estate or infrastructure projects, or investing through specialized funds that focus on these sectors.