SEBI Reclassifies REITs as Equity-Related Instruments: What It Means for Mutual Funds

The Securities and Exchange Board of India (SEBI) has introduced a significant regulatory change regarding Real Estate Investment Trusts (REITs). To boost participation from Mutual Funds and Specialised Investment Funds (SIFs), SEBI has officially reclassified REITs.

Vide Gazette notification dated October 31, 2025, SEBI has amended the Mutual Funds Regulations (1996).

Here is a detailed breakdown of what this reclassification means, the effective dates, and how it impacts existing investments.

1. REITs Now Classified as "Equity-Related Instruments"

The most significant change in this circular is the shift in how REITs are categorised for investment purposes.

• The New Rule: Effective from January 01, 2026, any investment made by Mutual Funds and Specialised Investment Funds (SIFs) in REITs will be considered an investment in "equity-related instruments."
• The Exception (InvITs): It is important to note that this change applies only to REITs. Infrastructure Investment Trusts (InvITs) will continue to be classified as "hybrid instruments" for Mutual Funds and SIFs.

2. What Happens to Existing Investments?

A common question arises regarding debt schemes that currently hold REITs. Since REITs are now equity-related, can debt funds still hold them?

• Grandfathering Clause: SEBI has decided that existing investments in REITs held by debt schemes of Mutual Funds as on December 31, 2025, will be "grandfathered." This means they are allowed to stay in the portfolio despite the new rule.
• Divestment Encouraged: While the existing holdings are allowed, SEBI has encouraged Asset Management Companies (AMCs) to gradually sell (divest) these REIT holdings from their debt schemes. This should be done carefully, considering market conditions, liquidity, and the best interests of the investors.

3. Market Capitalisation and Indices

With REITs moving to the equity category, they will now be measured alongside other stocks.

• AMFI Classification: The Association of Mutual Funds in India (AMFI) will now include REITs in their list of scrips classified by market capitalisation (Large Cap, Mid Cap, Small Cap).
• Inclusion in Indices: While the rule starts in January, REITs will not immediately appear in equity indices. SEBI has mandated a six-month cooling period. Any inclusion of REITs in equity indices will only happen after July 1, 2026.

4. Regulatory Updates for Schemes

To implement this change, Mutual Funds will need to update their official documents.

• Addendum Issuance: AMCs will issue an addendum (an official note) to make necessary changes to their Scheme Information Documents.
• No Fundamental Change: SEBI has clarified that this reclassification will not be considered a "change in fundamental attributes" of the scheme. This implies that it is a regulatory update rather than a change in the scheme's core investment objective.

Conclusion

This move by SEBI is designed to facilitate enhanced participation in the real estate sector by Mutual Funds and SIFs. By treating REITs as equity-related instruments, the regulator is aligning them closer to ownership assets rather than debt instruments, effective from the start of 2026.

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