In a significant move for the investment landscape, the Securities and Exchange Board of India (Sebi) has issued a new directive that will alter how mutual funds and specialized investment funds (SIFs) treat their holdings in Real Estate Investment Trusts (REITs). The capital markets regulator has announced that investments in REITs will be officially reclassified as equity-related instruments, a change set to take effect from the start of 2026.
Key Announcement and Effective Date
The core of the circular states that, starting January 1, 2026, any investment made by Mutual Funds and Specialised Investment Funds (SIFs) in REITs will be considered an investment in equity-related instruments. This strategic reclassification is explicitly aimed at boosting and facilitating enhanced participation from these funds in the REIT market. It is important to note that Infrastructure Investment Trusts (InvITs) will not be affected by this change and will continue to be classified as hybrid instruments for investment purposes.
Impact on Debt Mutual Funds and Grandfathering Clause
A crucial clarification provided by Sebi addresses the impact on debt-oriented mutual fund schemes. The regulator has confirmed that the new rule will not impact debt mutual funds in a disruptive way. To ensure a smooth transition, a grandfathering clause has been introduced. This means that all existing investments in REITs held by debt mutual funds, as well as the investment strategies of SIFs that are in place as of December 31, 2025, will be protected or 'grandfathered'.
However, Sebi has offered forward-looking advice to Asset Management Companies (AMCs). The circular encourages mutual fund houses to make efforts to divest REITs from their debt schemes. This divestment should be carried out strategically, taking into account prevailing market conditions, liquidity, and, most importantly, the interests of the investors in those schemes.
Operational Changes for AMCs and Equity Funds
For mutual fund houses, this reclassification necessitates updates to their scheme documents. Sebi has clarified that AMCs are required to issue an addendum to incorporate these necessary changes. Reassuringly, the regulator has stated that this update will not be considered a fundamental attribute change for the schemes, simplifying the compliance process.
Furthermore, the circular opens a pathway for including REITs in equity fund portfolios, but with a specific timeline. AMCs will be permitted to add this investment option to their equity funds only after a period of six months from the initial reclassification date. This means any inclusion of REITs in equity indices can be carried out only from July 1, 2026 onwards.
This comprehensive move by Sebi is poised to reshape the investment strategy for mutual funds concerning the real estate sector, potentially unlocking new avenues for growth and diversification while providing clear guidelines for a structured implementation.
