The Securities and Exchange Board of India (SEBI) has released a consultation paper that could mark a significant step forward in the evolution of India’s mutual fund landscape. The regulator is seeking public feedback on a proposal to enhance the investment limits of Mutual Funds (MFs) in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). The move is aimed at broadening investment avenues, improving diversification, and increasing capital inflows into these alternative asset classes.
Why REITs and InvITs Matter
REITs and InvITs are innovative financial instruments that provide investors exposure to income-generating real estate and infrastructure projects, respectively. These instruments combine features of both equity and debt, offering stable cash flows and the potential for capital appreciation. With India witnessing rapid urbanization and infrastructure development, REITs and InvITs have emerged as essential vehicles for channeling institutional and retail capital into long-term assets.
Currently, Mutual Fund schemes are allowed to invest up to 10% of their Net Asset Value (NAV) in REITs and InvITs, with no more than 5% in a single issuer. Additionally, no mutual fund, across all its schemes, can hold more than 10% of the total units issued by a single REIT or InvIT. These limits are designed to manage concentration risk but may also restrict portfolio optimization and diversification.
A Push for Reclassification
One of the key aspects of SEBI’s consultation is the question of whether REITs and InvITs should be classified as “equity” instruments rather than being treated as hybrid assets. Globally, many jurisdictions include REITs in equity indices, and Indian REITs already form part of indices like the MSCI India Small Cap and FTSE India Index. Proponents argue that these instruments offer ownership of underlying assets, voting rights on material transactions, and variable cash distributions – characteristics akin to equity holdings.
However, the Mutual Fund Advisory Committee (MFAC) and the Association of Mutual Funds in India (AMFI) have expressed caution. They view REITs and InvITs as hybrid securities due to their unique cash flow structures, restrictions on leverage, and half-yearly NAV disclosures. Moreover, treating them purely as equity could misalign them with traditional equity benchmarks, potentially skewing returns and risk metrics for index-tracking funds.
Mutual Fund Exposure So Far
As of December 31, 2024, 115 mutual fund schemes across equity, debt, hybrid, and solution-oriented categories had a combined exposure of ₹20,087 crore in REITs and InvITs. The average exposure across these schemes ranged from 1.8% to 3.7%, with some schemes investing as much as 9.6%. This data underlines a growing interest among fund managers in leveraging these instruments for income generation and portfolio diversification.
The Road Ahead
SEBI’s initiative is a timely and progressive one. Enhancing the investment ceiling in REITs and InvITs would not only benefit mutual fund investors through diversified risk exposure and potential for steady returns, but also deepen the market for these trusts, improving their liquidity and stability.
However, careful consideration must be given to the classification of these instruments. Labeling them as equity might offer short-term alignment with global standards, but long-term implications for portfolio construction, risk management, and investor expectations must be weighed thoroughly.
Conclusion
SEBI’s consultation paper opens up a critical dialogue on the role of REITs and InvITs in India’s investment ecosystem. As India continues to build its infrastructure and modernize real estate markets, mutual funds investing in these sectors can play a pivotal role. Stakeholders—investors, fund houses, and policymakers—must now collaborate to ensure the proposed reforms strike the right balance between innovation, investor protection, and market development.
