SEBI’s Landmark Decision: How REIT Reclassification Impacts Mutual Fund Investments

India’s listed REITs have moved from niche products to a market capitalisation above INR 1 trillion. A new report now sees INR 10.8 trillion potential by 2029 across office and retail assets in the top seven cities.

A Real Estate Investment Trust, or REIT, is a pooled vehicle that owns and manages income-generating real estate for investors. Most of its returns come from rental income and, at times, capital gains on property sales. 

Against this backdrop of steady growth and institutionalisation, SEBI REIT regulations have entered a new phase. From 1 January 2026, SEBI rules require mutual funds and specialised investment funds to treat REITs as equity-related instruments. After this Sebi circular, mutual funds could raise their exposure to REITs in 2026. This article explains what that means for investors.

The Regulatory Shift: SEBI Reclassifies REITs as Equity

SEBI’s latest circular amends mutual fund regulations so that, from 1 January 2026, every mutual fund or specialised investment fund investment in listed REIT units will be treated as an equity-related instrument. The underlying assets have not changed, but their regulatory bucket has. 

InvITs, by contrast, continue to sit in the hybrid category for exposure limits and scheme classification. This single change under SEBI REIT regulations will influence how fund houses count REITs within equity quotas, design product mandates, and position risk across portfolios.

Rationale Behind the Reclassification 

SEBI has framed the move as a way to increase participation by mutual funds and SIFs in a market that has become deeper and more liquid in recent years. Listed REITs trade on stock exchanges, respond to equity-style risks such as occupancy, rentals, and valuations, and distribute income that can fluctuate with property cycles. 

Regulators, therefore, see their profile as closer to equity than to traditional fixed income. At the same time, the reclassification helps align India with global practice, where REITs are usually counted as part of equity allocations and often sit inside mainstream equity indices. 

The Distinction of InvITs 

InvITs, which pool capital into infrastructure assets such as roads, power lines, and telecom networks, remain classified as hybrid instruments for mutual funds and SIFs. Their cash flows tend to be more stable and contractual, but trading liquidity is lower, and a significant share of InvIT issuance is privately placed. 

SEBI has therefore chosen to preserve their existing treatment rather than move them into the pure equity bucket. For fund managers, this means infrastructure exposure via InvITs continues to count towards hybrid and income-oriented strategies, rather than competing directly with listed equity when filling scheme-level limits.

Implementation and Transition Guidelines

The circular gives the industry a clear transition path. Existing REIT holdings inside debt schemes and SIF strategies as of 31 December 2025 will be grandfathered. 

AMFI must now include REITs in its equity scrip classification based on market capitalisation, while fund houses issue addenda updating scheme documents; SEBI has clarified that this is not a fundamental attribute change. Finally, REITs can enter equity indices only from 1 July 2026, providing a six-month window for portfolios and benchmarks to adjust to the new framework.

Managing Existing Portfolios: The Grandfathering Clause 

SEBI has drawn a clear line between past and future exposure. All REIT units that debt mutual fund schemes and SIF strategies hold as on 31 December 2025 will continue under the old treatment and will be grandfathered. 

This approach avoids forced selling or sudden breaches of scheme limits when the new SEBI REIT regulations take effect on 1 January 2026. For investors in debt funds, it means existing REIT positions stay in place and continue to run down in line with each scheme’s stated risk profile and duration strategy.

Encouraging Divestment:

Although SEBI has allowed grandfathering, it also signals an expected direction of travel for debt products. The circular urges AMCs to gradually divest REITs from debt schemes, after considering market conditions, liquidity, and the overall interest of investors. 

Fund houses, therefore, need to plan orderly exits rather than abrupt disposals, using redemptions, secondary market trades, or portfolio rebalancing. Over time, this should concentrate REIT exposure in equity and hybrid strategies that are better suited to manage equity-like volatility and income patterns.

Risk Management and Diversification: The Case for Corporate Bonds 

After the latest SEBI REIT regulations, investors need to view REITs as equity-like exposure. Prices move with market sentiment, and cash flows depend on the health of underlying properties.

Key risks include:

• A 25% year-on-year jump in new office supply to about 24.5 million sq ft means future leasing must stay strong to protect rentals and yields.
• Distribution yields around 6–6.5% remain attractive but can soften if vacancies rise, rentals reset, or incentives increase.
• Heavy dependence on global corporates, particularly in technology and allied services, leaves cash flows exposed to AI-related job cuts or delayed expansion plans.
• Near-term global and geopolitical uncertainty can lengthen decision cycles for anchor tenants, which may slow fresh leasing just as new supply comes onstream.

In short, REITs offer income and growth, but behave like cyclical equity, not fixed income.

Corporate bonds help offset that cyclicality by adding more stable, contract-based cash flows. When an investor buys a corporate bond, he or she lends to a company in exchange for fixed coupon payments and a defined maturity payout. Returns rely more on the issuer’s credit quality than on office rentals or occupancy cycles.

High-quality corporate bonds, whether held directly or through mutual funds, can:

• Offer relatively predictable interest payments that help match near to medium-term cash flow needs.
• Reduce overall portfolio swings when equity and REIT markets turn volatile.
• Allow investors to choose tenors and credit profiles that fit their risk appetite.

For mutual fund investors, allocating a portion to corporate bond or target-maturity strategies can provide a fixed-income anchor, while REIT allocations sit in the growth bucket. This mix helps link risk management, income stability, and diversification in a clear, rule-based way.

Conclusion

SEBI REIT regulations create more room for growth-oriented allocations, but they also push REITs firmly into the equity risk zone. Investors who want steadier income may balance this with high-quality bonds that offer clearer cash flows and defined maturities.