SEBI to classify REIT investments as equity from January 2026

In a significant regulatory shift aimed at boosting institutional participation in India’s real estate market, the Securities and Exchange Board of India (SEBI) has announced that all investments made by mutual funds (MFs) and specialised investment funds (SIFs) in Real Estate Investment Trusts (REITs) will be treated as equity-related instruments starting January 1, 2026.

The market regulator issued a circular on November 28 outlining amendments to the SEBI (Mutual Funds) Regulations, 1996, effectively reclassifying REITs from their earlier treatment to equity-related instruments. SEBI said this move is intended to encourage greater exposure of MFs and SIFs to REITs, enabling investors to participate more actively in India’s growing real estate investment ecosystem.

“With effect from January 1, 2026, any investment made by mutual funds or SIFs in REITs shall be considered an investment in equity-related instruments,” the circular noted.

However, SEBI has clarified that REITs will not be immediately included in equity market indices. Such inclusion will be allowed only after a six-month buffer period, making REITs eligible for index representation from July 1, 2026. This transition period is intended to ensure market stability and allow fund managers to adjust their portfolios smoothly.

The regulator also confirmed that Infrastructure Investment Trusts (InvITs) will continue to be classified as hybrid instruments for MFs and SIFs. No changes have been made to their regulatory treatment.

To avoid disruption in existing portfolios, SEBI has granted “grandfathered” status to all REIT investments currently held under debt schemes of mutual funds and SIF strategies up to December 31, 2025. Grandfathering ensures that existing investments or policies are exempted from newly introduced rules.

While the exemption protects current holdings, SEBI has encouraged asset management companies (AMCs) to gradually divest REIT exposures from their debt schemes over time. AMCs have been advised to consider market conditions, liquidity factors and investor interest while exiting these positions to maintain stability and avoid sudden withdrawal pressures.

SEBI said the reclassification and associated regulations are part of its broader effort to strengthen investor protection, enhance clarity in the classification of investment instruments and promote the orderly development of India’s securities market.