MF leaders welcome SEBI’s REIT-as-Equity Move; tax opportunities seen as advantages amid liquidity concerns

Mutual fund leaders have welcomed SEBI’s decision to classify Real Estate Investment Trusts (REITs) as equity from January 1, saying it removes regulatory constraints, unlocks tax advantages, and opens the door for managers to explore a growing asset class. After announcing the decision in the last board meet, SEBI released an official circular on November 28. Currently, exposure to REITs and InvITs among mutual funds remains minimal. Radhika Gupta, MD & CEO of Edelweiss MF, said, “This is a positive step. REITs, by nature, behave closer to equity, and allowing them to be counted within equity will definitely boost demand. Higher demand will, in turn, encourage more supply from the REIT side. But as of now, the actual exposure is extremely small.” As per the circular, SEBI has asked debt funds to grandfather existing holdings while barring new purchases. This allows debt funds to exit gradually, without being forced into abrupt sales that could be arbitraged. “Will debt funds transition immediately? I don’t think so, because the current exposure is tiny. So any transition will naturally happen over time,” Gupta said. She also highlighted that hybrid and multi-asset funds could be early adopters, as REITs offer lower volatility than pure equity with predictable income. “Once REITs are included in indices, we may see more interest, especially within hybrid funds. REITs fit well there because they have lower volatility than pure equity and provide some income predictability.” Similarly, Akhil Chaturvedi, ED and CBO at Motilal Oswal AMC, described the move as “very positive,” citing both investment and tax benefits. He explained that equity classification allows fund managers to use REITs strategically across portfolios. “Two things will happen here. First, you get a new asset class to invest in. Second, there is a tax advantage because of the equity classification. Earlier, REITs were treated as a debt instrument and there were investment caps, which was a limitation,” he said. Chaturvedi also noted REITs’ hybrid nature, which provides flexibility in volatile markets. “REITs are generally less volatile than equity. Technically, they sit between debt and equity: a high-risk debt product but a low-risk equity product. For BAFs, multi-asset funds, and even some of the newer categories like SIFs, this will make sense. Fund managers can use them incrementally depending on how they want to position their funds,” he added. He highlighted that tax benefits make them attractive for retail investors too. “Many multi-asset and BAF schemes already hold small allocations to REITs, but treating them as equity brings tax advantages. Fund managers can buy more REITs, and the equity taxation structure is more favourable. For individuals too, buying REITs becomes attractive as equity tax is better than being taxed at one’s marginal rate. This could lead to more participation.” Anil Ghelani, Head of Products at DSP Mutual Fund said the circular clarifies operational aspects of the earlier decision. “Debt schemes that currently hold REITs will need to gradually reduce those holdings, but because industry-wide exposure is extremely small, the impact is likely to be limited. SEBI has prudently avoided specifying an exit deadline so that funds are not forced to sell in a way that can be negative for the unit Holders. They have simply barred new purchases of REITs in debt schemes, and existing exposures will be monitored and sold over time.,” he explained. The SEBI circular has also mentioned that Reits can be included in indices after 6 months ( July 2026). Ghelani explained, “is for eligibility of REITs for inclusion in equity indices, provided they meet the various criteria of respective indices, such as market capitalisation. This makes it possible, eventually, for REITs to appear in index funds or ETFs, though that will depend on their growth and liquidity.” The regulatory change comes as India’s REIT market grows rapidly. Five publicly listed REITs, namely Brookfield India Real Estate Trust, Embassy Office Parks REIT, Mindspace Business Parks REIT, Nexus Select Trust, and Knowledge Realty Trust which collectively manage over 176 million sq ft of office and retail space, according to the Indian Reits Association. During Q2 FY26, they distributed over Rs 2,331 crore to more than 3.3 lakh unitholders. Gross AUM stands at roughly Rs 2.35 lakh crore, with cumulative distributions since inception exceeding Rs 26,700 crore. Their combined market capitalisation crossed Rs 1.6 lakh crore in mid-November 2025. According to a Nuvama report, Q2 FY26 saw strong office leasing driven by domestic companies and global capability centres, while SEZ-to-non-SEZ conversions boosted occupancies. Committed occupancies reached around 90%, net leasing remained healthy, and DPUs rose 12–14% YoY. Rents increased 3–4% YoY, leverage remained comfortable, and acquisition pipelines and capex plans accelerated across REITs. Gupta said the combination of regulatory clarity, market growth, and tax advantages makes now the right time for mutual funds to explore REIT allocations. “Currently, our SIF doesn’t have any REIT exposure, but we may explore it now since it will be counted as part of the equity allocation,” she said. Chaturvedi added that REITs provide flexibility for portfolio positioning, allowing managers to replace cash or debt-like allocations in volatile markets. They will also be exploring the space come January for equity funds. Experts added that adoption will initially be gradual due to liquidity constraints, but the structural foundation for meaningful participation is now in place. “With SEBI’s rule change, mutual funds now have the regulatory room, market scale, and income visibility to integrate REITs more actively into equity and hybrid strategies. Adoption will be gradual, but the structural foundation is now in place for meaningful participation,” Ghelani said.