REITs get equity status: What it means for your portfolio

The recent reclassification of REITs (Real Estate Investment Trusts) from a “hybrid” to an “equity” asset class marks a significant regulatory shift with far-reaching implications for both the mutual fund and real estate industries.

What’s Changed?

Until now, mutual funds could invest in REITs, but were restricted to a 10% cap. With REITs now recognised as equity instruments, this cap no longer applies. Mutual funds can increase their REIT exposure based on their strategy and mandate, just like they would with listed stocks.


This change is expected to reshape fund managers’ asset allocation frameworks and allow deeper integration of REITs into mainstream portfolios, especially diversified and thematic equity funds. For retail investors, it translates into easier and broader access to REITs through mutual funds, without the need for direct participation.

Broader Industry Impact

While the regulatory change is headline-worthy on its own, its ripple effects could be even more significant. Increased mutual fund participation improves fund flows to REITs, boosting their liquidity and long-term viability. This, in turn, may incentivise more real estate developers to consider the REIT route for monetising commercial assets.

India currently has only five REITs and two SM REITs (Small and Medium REITs), offering limited options to investors. But policy moves like this lay the groundwork for more REIT listings in the future.

Do REITs Deserve a Place in Your Portfolio?

The answer is a clear yes. REITs offer retail investors exposure to commercial real estate, a segment traditionally accessible only to large institutions or HNIs due to high ticket sizes and complex deal structures.

For most Indian investors, real estate exposure is limited to their primary residence, which is illiquid and generates no income. REITs, by contrast, offer:

• A low-ticket entry to Grade-A commercial property,
• Regular income through mandated distributions, and
• Portfolio diversification and lower volatility due to their real asset backing.

They also offer the benefit of professional management and access to landmark office properties that would otherwise be out of reach.

What About Taxation?

While REITs now enjoy equity classification from a mutual fund exposure standpoint, taxation rules remain unchanged for now. For a mutual fund to qualify as an equity fund for tax purposes, at least 65% of its portfolio must be invested in equity shares of domestic listed companies.

REITs do not count towards this 65% threshold. So if a fund increases REIT allocation beyond a point, it could fall under the “hybrid” taxation regime. For now, investors should be mindful that equity status under SEBI regulations does not automatically translate to equity taxation status under the Income Tax Act, unless notified separately by tax authorities.

What Lies Ahead?

At present, there are no mutual fund schemes exclusively focused on REITs. But with this reclassification and a possible supportive tax stance in the future, specialised REIT-focused mutual funds may emerge, offering pooled exposure to real estate assets with professional selection and management.

Currently, the market capitalisation of Indian REITs is just ~0.3% of the total listed equity market. By comparison, REITs account for ~17% in Singapore, ~6% in Australia, and
~2.6% in the US. India is just getting started on this journey, and the scope for growth is significant.

In the long run, such reforms can help formalise real estate funding, deepen capital markets, and give millions of investors a new, regulated way to participate in the commercial real estate story.

(The author is Assistant Vice President, Investment Strategy at 1 Finance)

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)