Does SEBI's Proposal to Increase Investment Limit in REITs and InvITs Make Sense

Apr 24, 2025 / Reading Time: Approx. 8 mins


Back in February 2017, the capital market regulator, the Securities and Exchange Board of India (SEBI) allowed mutual funds under all its schemes to invest no more than 10% of units issued by a single issuer of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs).

Further, the notification said, that a mutual fund scheme shall not invest more than 10% of its NAV in the units of REITs and InvITs. Also, the scheme cannot invest more than 5% of its NAV in units of REITs and InvITs issued by a single issuer.

These limits, however, were not made applicable for investments in the case of index funds or sector or industry-specific schemes pertaining to the REIT and InvIT.

REITs and InvITs, as you know, are entities that invest in rent-yielding assets and payout dividends to their investors. REITs own and then lease out real estate, whether commercial or residential. Investors are given units, similar to those in a mutual fund scheme. Units of the REITs are traded on exchanges and provide the investor with an option to exit, provided there are buyers available.

Speaking about InvITs, they function similarly, except that they own infrastructure companies (power generation, telecommunications, road construction etc.) instead of real estate. The sponsor sets up the InvIT, which in turn invests in the eligible infrastructure projects either directly or indirectly, i.e. via a Special Purpose Vehicle (SPV). The regulations require 90% of the net distributable cash flows to be distributed to the unitholders.

What Has SEBI Proposed?

Recently the capital market regulator in a consultation paper has proposed enhancing limits for investments by mutual funds in REITs and InvITs.

It is proposed that the single issuer limit be increased from 5% to 10%, and the overall limit at the fund house level from 10% to 20%, however for debt mutual fund schemes it may be limited to 10%.

SEBI Proposal for Increasing Exposure to REITs and InvITs

(Source: SEBI's Consultation Paper)
 

The Objective of the Proposal

The regulator is of the view that enhancing the investment limit in REITs and InvITs shall provide more investment avenues and further diversification to schemes of mutual funds.

Moreover, it is expected to increase the capital inflow into these instruments, broadening their market base and liquidity.

What's More...

The regulator has also proposed to classify REITs and InvITs as equity instruments, as per representations from certain stakeholders and deliberated by SEBI's board earlier.

It is observed that REITS and InvITs by virtue of their unique features are hybrid instruments.

Globally, in some jurisdictions, REITs and InvITs are classified as equity instruments and form part of equity indices. Certain REITs already form part of some of the global equity indices such as MSCI India Small Cap Index, FTSE India Index etc.

At present, SEBI (Mutual Fund) Regulations, 1996 define the term 'equity-related instruments' as under:

"Equity related instruments" include convertible debentures, convertible preference shares, warrants carrying the right to obtain equity shares, equity derivatives and such other instrument as may be specified by the Board from time to time."

What Does AMFI and MFAC Have to Say About This?

The Association of Mutual Funds in India (AMFI) and the Mutual Fund Advisory Committee (MFAC), are of the view that the REITs and InvITs should be classified as hybrid securities rather than as equity or debt securities.

This is mainly because of the dissimilarity in the structure related to their cash flows, dividends, half-yearly Net Asset Value (NAV) calculation based on valuation, voting rights limited to certain operational decisions, and so on.

In addition, the MFAC has weighed on whether the inclusion of REITs and InvITs as constituents of equity indices will be appropriate and fair to the investors in the schemes.

The MFAC, however, is of the view that considering the actual number of listed REITs and InvITs, their volumes and features, the current limit can be enhanced especially for equity mutual fund schemes.

The MFAC is not in favour of launching dedicated mutual fund schemes for REITs and InvITs, considering the limited universe of REITs and InvITs as of date and the lack of liquidity offered by such instruments listed on the exchanges.

What is the Exposure of Mutual Fund Houses to REITs and InvITS Today?

The table below shows that over the years, mutual fund houses have increased holdings in REITs and InvITs, but a significant increase is only seen in the last couple of years.

As of today, although mutual fund houses are permitted to invest up to 10% in a single issuer of REITs and InvITs, their allocation is tiny as a percentage of their Assets Under Management (AUM).

Mutual Funds Holding REITs and InvITS

Fund Houses CY2021 CY2022 CY2023 CY2024 CY2025*
REITs & InvITS (Rs in Cr) % of AUM REITs & InvITS (Rs in Cr) % of AUM REITs & InvITS (Rs in Cr) % of AUM REITs & InvITS (Rs in Cr) % of AUM REITs & InvITS (Rs in Cr) % of AUM
ICICI Pru MF 1,119 0.24 1,870 0.37 3,625 0.54 5,106 0.57 5,195 0.57
HDFC MF 1,524 0.35 1,518 0.33 4,429 0.76 4,984 0.63 5,055 0.66
SBI MF 652 0.10 771 0.11 3,006 0.34 5,618 0.52 4,810 0.45
Aditya Birla SL MF 204 0.07 245 0.09 385 0.12 983 0.26 894 0.24
WhiteOak Capital MF - - - - 123 1.55 393 2.40 608 3.39
Kotak MF 236 0.08 293 0.10 368 0.10 613 0.13 594 0.12
Nippon India MF 3 0.00 3 0.00 156 0.04 517 0.09 588 0.10
Baroda BNP Paribas - - 7 0.03 170 0.53 355 0.80 382 0.90
Tata MF 72 0.09 29 0.03 208 0.15 279 0.15 279 0.16
Franklin Templeton MF 134 0.20 87 0.13 157 0.18 213 0.19 225 0.21
*As of March 31, 2025
The list is not exhaustive.
Only the top 10 mutual fund houses investing in REITs and InvITs are considered.
For illustration purposes only.
(Source: ACE MF, data collated by PersonalFN Research)
 

The main reason for this is the limited number of REITs (4) and InvITs (18) available for investing, the low liquidity offered, and the challenges in evaluating the best one.

Also, with Indian equities looking promising for wealth creation in the long term, given that India is the fastest-growing major economy and is contributing to global growth, the fund managers are showing limited interest in REITs and InvITs. At present only 22 out of 45 mutual fund houses are holding REITs and InvITs.

It would take a while before a greater number of REITs and InvITs are available for investing with transparent data and more information dissemination to make rational decisions.

Currently, there are four REITs listed on the BSE and NSE viz. Embassy REIT, Brookfield REIT, Mindspace REIT and Nexus Select Trust. As regards InvITs there are 18, including Indus Infra Trust, National Highways Infra Trust, Energy Infrastructure Trust, India Grid Trust, Powergrid Infrastructure Investment Trust, IRB InvIT Fund and others.

Through the consultation paper, SEBI has also sought opinions from the public on the proposals. If you have any thoughts or feedback on REITs and InvITs, share it with the regulator by May 11, 2025, by clicking here.

In my view, increasing the limits for mutual funds to invest in REITs and InvITs would not make sense, as the current limits are anyway grossly underutilised, and liquidity is low. The regulator should ensure that more data and information on REITs and InvITs are transparently made available to make sensible investment decisions.

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ROUNAQ NEROY heads the content activity at PersonalFN and is the Chief Editor of PersonalFN’s newsletter, The Daily Wealth Letter.
As the co-editor of premium services, viz. Investment Ideas Note, the Multi-Asset Corner Report, and the Retire Rich Report; Rounaq brings forth potentially the best investment ideas and opportunities to help investors plan for a happy and blissful financial future.
He has also authored and been the voice of PersonalFN’s e-learning course -- which aims at helping investors become their own financial planners. Besides, he actively contributes to a variety of issues of Money Simplified, PersonalFN’s e-guides in the endeavour and passion to educate investors.
He is a post-graduate in commerce (M. Com), with an MBA in Finance, and a gold medallist in Certificate Programme in Capital Market (from BSE Training Institute in association with JBIMS). Rounaq holds over 18+ years of experience in the financial services industry.


Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.

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