The Finance Ministry has formally backed the classification of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) as equity instruments, setting the stage for a possible regulatory shift by SEBI in its upcoming board meeting, expected within the next two months. If approved, this move could significantly enhance mutual fund (MF) participation in REITs and InvITs, which currently suffer from limited retail traction due to their hybrid classification under SEBI norms.
According to senior government officials, the ministry has conveyed its support to SEBI, stating that the instruments merit classification as equity due to their listed structure, investor ownership rights, and capital appreciation potential. The expectation is that the SEBI board may approve the reclassification from “hybrid” to “equity”, thereby allowing mutual funds to include REITs and InvITs in their equity-oriented schemes and expand investor access.
Highlights:
Finance Ministry supports equity status for REITs, InvITs.
SEBI board may decide in the next two months.
Move could increase MF allocation and investor access.
Sector benefits include stronger capital inflows and wider market participation.
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Investment Limit Expansion Likely to Follow Classification Change
In parallel with the classification shift, SEBI is also considering a proposal to double the investment limits for mutual funds in REITs and InvITs. Currently, mutual funds can invest up to 10% of a scheme’s NAV in these instruments, with no more than 5% per issuer. The proposal seeks to raise the total limit to 20%, and the single-issuer limit to 10%, which may also be cleared in the same board meeting.
Officials argue that these revised limits are critical to support deeper mutual fund participation. Despite being listed and dividend-paying, mutual fund exposure to REITs and InvITs currently stands below 1%, due to restrictive investment norms and classification barriers. The proposed changes are seen as a necessary step to help channel long-term capital into real estate and infrastructure assets while offering stable returns to retail investors.
Highlights:
SEBI may raise MF investment limits from 10% to 20% of NAV.
Current caps blamed for sub-1% MF exposure in REITs and InvITs.
Foreign mutual funds are also pushing for higher NAV limits.
Limit change aims to boost retail participation and sector funding.
Debate Over Equity vs. Hybrid Status Continues Among Experts
While the government and SEBI appear aligned on the equity classification path, the proposal has triggered a sharp divide among market participants and legal experts. Some support the equity tag to unlock more institutional investments and improve retail visibility, while others argue that REITs and InvITs are better suited to hybrid classification, given their cash flow patterns and risk-return profile.
Siddharth Maurya, Founder of Vibhavangal Anukulakara, argues that low liquidity, limited listing history, and investor unfamiliarity have hindered broader participation. The hybrid label, he says, is a deterrent for equity-focused schemes, despite the instruments’ income stability. On the other hand, Vivek Iyer of Grant Thornton Bharat believes retaining hybrid status would help mutual funds design more suitable products that align with the instruments’ mixed characteristics.
The Association of Mutual Funds in India (AMFI) and SEBI’s own Mutual Fund Advisory Committee (MFAC) also maintain that REITs and InvITs should remain a distinct hybrid asset class, due to structural differences such as semi-annual NAV disclosure, limited voting rights, and the nature of cash distributions.
Highlights:
Experts divided over equity vs. hybrid classification.
AMFI, MFAC favour hybrid label to reflect real structure.
Legal experts cite NAV timing, rights structure as hybrid indicators.
Classification debate impacts MF product design and investor targeting.
Core Characteristics of REITs and InvITs Support Both Equity and Debt Features
REITs and InvITs are designed to generate both income and capital gains, blending characteristics of traditional equities and fixed-income instruments. While they are listed and traded like stocks, they must distribute at least 90% of their net distributable cash flows to unitholders, creating a debt-like income stream. Their ownership rights and performance-linked returns, however, offer equity-like benefits as well.
This dual nature has placed them in a regulatory grey zone. A shift toward equity classification may simplify inclusion in more mutual fund schemes and widen access, but may also misrepresent their underlying cash flow mechanics, say some analysts.
Highlights:
REITs and InvITs blend fixed income and equity features.
90% cash distribution rule mimics debt investments.
Traded on exchanges, offering capital appreciation potential.
Classification impacts risk profiling, fund mandates, and investor expectations.
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