In a major move aimed at increasing market participation, the Securities and Exchange Board of India (SEBI) has changed the classification of Real Estate Investment Trusts (REITs) to that of equity-related instruments. As a result of this change, the two investor groups, mutual funds and SIFs (Special Investment Funds), which have limited exposure to REITs due to classification constraints, are expected to significantly increase their investment in REITs.
Announcing the change through a circular issued, the regulator said, “With effect from January 1, 2026, any investment made by mutual funds and SIFs in REITs shall be considered as an investment in equity-related instruments.” The reclassification marks a notable shift in India’s investment framework for real estate-linked securities, expanding the ease with which fund managers can allocate money to these income-generating assets.
SEBI also clarified that Infrastructure Investment Trusts (InvITs) will continue to be categorised as hybrid instruments, maintaining their distinct identity within the broader alternate investment space. REITs, by contrast, will now feature more prominently alongside mainstream equities in the portfolios of domestic fund houses.
Explaining the transition rules, the regulator noted that existing REIT investments held under debt schemes and SIF strategies as of December 31, 2025, would be grandfathered. The circular stated, “Asset management companies are encouraged to gradually divest such holdings based on market conditions and investor interest.” By avoiding a forced exit, SEBI aims to prevent market disruption while still nudging funds to align with the new framework over time.
The Association of Mutual Funds in India (AMFI) will update its scrip classification list accordingly, bringing REITs formally under the equity universe for industry-wide categorisation. Mutual fund houses will also need to revise their scheme documents to reflect the updated exposure classification. SEBI emphasised that this update, required through a simple addendum, “shall not be treated as a fundamental change to the scheme.” This removes the need for a unitholder approval process and allows for smooth, swift compliance.
A related change will come into effect later next year: REITs may be included in equity indices only after July 1, 2026. This delayed inclusion gives index providers time to adjust their methodologies and assess liquidity, size, and free-float patterns in the domestic REIT universe before integrating them into benchmark portfolios.
The regulator's decision is based on changes made by the SEBI board in September 2025 to the SEBI (Mutual Funds) Regulations, 1996. These modifications provide a framework for REITs to be formally identified as equity instruments while inviting those with InvITs to remain as hybrid-classification. The action is largely interpreted as being an integral part of the enhancement of India's capital markets to increase the long-term domestic participation of real estate-backed platforms.
Market analysts reckon that the reclassification may have a significant impact on the liquidity levels of the market, be instrumental in widening the institutional involvement, and increase the visibility of REITs in the Indian investment space. Since REITs are the most efficient vehicles to invest in income-generating commercial assets—normally office parks, malls, or rental-driven properties—mutual funds can now incorporate them more effortlessly into equity strategies targeting yield stability and diversification.
By the time the freshly laid-down rules become operational early next year, there is a good chance that India's REIT market will be able to attract a bigger pool of institutional capital. This is because the Indian REIT market is still in its infancy if we are to compare it with global counterparts. SEBI's revised categorisation is likely to result in greater market depth, higher stability over the long term, and the facilitation of the gradual realisation of the formalised real estate investment vehicles in India.
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