MUMBAI: Mutual funds remain cautious on real estate investment trusts (Reits) despite the Securities and Exchange Board of India’s (Sebi) move to reclassify them as equity instruments, a step intended to deepen the market and align India with global standards.
The regulatory shift, effective 1 January, reclassified Reits as stocks from hybrid instruments. The change is expected to pave the way for their inclusion in equity indices by July 2026 and, eventually, attract larger institutional flows. But fund houses say the move has not materially altered their investment calculus.
Industry executives say liquidity constraints, scarce supply and limited upside in Reit prices still outweigh the regulatory tailwind. The reclassification has also introduced portfolio trade-offs for certain schemes, particularly hybrid funds, further dampening near-term enthusiasm.
Overall mutual fund exposure to Reits stood at ₹14,410 crore, a small fraction of the industry’s total assets under management of ₹66 trillion as of fiscal 2025, according to data from Sebi. By comparison, equity schemes saw inflows of ₹2.63 trillion during the same period.
Liquidity and allocation curbs
“Mutual funds may not be looking to invest in Reits in equity schemes right now. One of the reasons is that there is a low possibility of price appreciation. This reduces the chances of equity returns from Reits,” said Sandeep Bagla, chief executive officer of Trust Mutual Fund. “Liquidity is still an issue with Reits and MFs (mutual funds) would want to see greater liquidity before committing meaningful funds.”
India currently has five listed Reits, according to the Indian REITs Association. Their gross asset values range from about ₹29,253 crore to over ₹64,551 crore, with total unitholders across the sector at over 331,000. The asset class was launched in 2014, and the limited number of issuers constrains the buyer-seller base in the public market, keeping liquidity thin.
Reits allow investors to pool money to own income-generating commercial real estate such as office parks and malls, with most of the cash flows distributed back to unitholders. Listed on stock exchanges, they offer exposure to commercial property without the high capital outlay and illiquidity of direct ownership. Returns are driven largely by rental income and occupancy levels, making them more yield-oriented than growth-oriented.
Fund managers say that profile makes them behave more like bonds than high-growth equities.
“We are only buying good quality paper to hold as liquidity is still an issue for Reits. The segment needs more players and better quality paper to see more interest but these will only come with time. The market will not change overnight due to the reclassification” said DP Singh, deputy managing director and joint chief executive of SBI Mutual Funds.
“Since most Reits are mid-cap, it might give fund managers of mid-cap funds more flexibility to choose a Reit when mid-cap stocks are expensive,” said an equity fund manager on the condition of anonymity. Even so, the opportunity set remains narrow, making it difficult for large funds to build or exit positions without affecting prices.
The caution persists despite headline growth. The combined market capitalization of Reits has grown sixfold since the first listing, reaching ₹1.6 trillion as of 30 September 2025, while gross asset value is estimated at ₹2.6 trillion following recent acquisitions, according to a 2026 report by JLL, a global professional services firm specializing in real estate and investment management.
Over six years, the market has expanded from a single Reit managing 33 million sq. ft in 2019 to five Reits controlling 174 million sq. ft of office and retail space, translating into a 40% compound annual growth rate. JLL estimates a potential fivefold expansion opportunity of ₹10.8 trillion across office, retail and upcoming institutional-quality supply in the top seven cities.
Portfolio trade-offs
Beyond liquidity, the reclassification has altered portfolio construction dynamics.
“Not a lot has changed for mutual funds since the reclassification. Positive uptake may take a while. However, a negative impact of the new norms is that now fund managers have to think about how to accommodate Reits in their net equity exposure,” said the equity fund manager cited earlier.
“For instance, in a hybrid fund, one can invest 80% of the portfolio in equity. Now Reits will also have to be included in that 80%, which makes a fund manager recalibrate whether to include it or move to other stocks,” this person added.
That creates a trade-off: adding Reits means reducing holdings in other equities.
Some industry participants argue structural changes could help deepen the segment.
“A separate product for Reits and InvITs could be created and that might help in the growth of the segment. The current limit of 5-10% investments by a mutual fund scheme could be increased to at least 50%, such that mutual funds can structure products around Reits and InvITs and participate in these markets meaningfully,” said Bagla.
“Index inclusion is likely to have a positive long-term impact. Once Reits are included in broader equity indices, passive investment flows from Exchange Traded Funds and index funds automatically increase demand for these,” said Sumeet Bhatia, managing director, Capital Market Services, Savills India.
He added that to improve liquidity, India needs to increase its supply of Reits and allow broader asset diversification within the instrument.
Retail participation, too, is evolving.
“Retail investors often enter Reits with equity-like return expectations, which sometimes leads to disappointment during periods of price stagnation despite stable yield payouts,” said Bhatia. “Over time, as financial literacy improves and investors better understand Reits as income-generating instruments rather than high-growth equities, retail participation is likely to become more stable and long-term oriented.”
Abhishek Kumar, founder and chief investment advisor at Sahaj Money, said asset managers may be waiting for scale to build before moving aggressively. “AMCs may be cautious due to the current small size of Reit market as that could expose them to liquidity risk. So they might be waiting for other AMC (asset management company) to act and not be the first mover.”
“Investors are really interested in Reits due to the low ticket size in comparison to buying physical real estate. Investing in Reits may look like fishing in a barrel to investors looking from outside but in reality as there are limited options and low AUM (assets under management) size to choose from hence they could expose themselves to concentration and liquidity risk,” Kumar added.