SEBI Proposes to Enhance Mutual Fund Investment Limits in REITs and InvITs

Under the extant framework governing mutual funds (MFs), MFs cannot invest more than 10% of their net asset value in real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) with a sub-limit of 5% for a single issuer. Across all schemes, MFs cannot own more than 10% of units of a single issuer. The Securities and Exchange Board of India (SEBI) vide consultation paper dated April 17, 2025, has proposed the following key changes in the framework applicable to MFs:

• Classification of REITs and InvITs as equity and their inclusion in equity indices
  SEBI has received representations from stakeholders suggesting that certain features of REITs and InvITs such as unitholders’ beneficial ownership of underlying assets, their right to vote in material transactions, and the mandatory distribution of at least 90% of net distributable cash flows could justify classifying these instruments as equities, a practice already adopted in some jurisdictions. However, both Association of Mutual Funds in India (AMFI) and Mutual Fund Advisory Committee (MFAC) maintain that due to distinct structural characteristics like cash flow dividends, half yearly net asset value calculations, limited voting rights on certain operational decisions, REITs and InvITs are more appropriately categorized as hybrid securities rather than equity instruments. AMFI and MFAC have also deliberated whether including REITs and InvITs in equity indices would be fair to investors following such indices as a benchmark, given the structural differences between these instruments and traditional equities.
• Dedicated MF schemes for REITs and InvITs
  AMFI and MFAC are of the view that dedicated MFs for REITs and InvITs could be explored over the medium to long term. Considering the limited number of REITs and InvITs available and the lack of liquidity in these instruments on the exchanges, it would not be desirable to launch a dedicated MF scheme for investing in REITs and InvITs.
• Enhancing investment limits in REITs and InvITs for MFs
  SEBI has proposed to enhance the current investment limits for MFs in REITs and InvITs. In this regard, the following changes are proposed:
• for equity, debt and hybrid schemes, the investment limit in REITs and InvITs of a single issuer may be increased to 10% of the net asset value of the fund, up from current limits of 5% and 10% as previously specified; and
• for equity and hybrid schemes, the overall exposure limit to REITs and InvITs may be raised from 10% to 20%. However, no change in investment limits is proposed for debt schemes, as REITs and InvITs are considered riskier than debt instruments, and perpetual in nature.

Conclusion

While SEBI’s proposal aims to broaden investment opportunities, enhancing MF investment limits in REITs and InvITs may be premature. Given the lack of liquidity and a small market for these instruments, conservative caps may be maintained to limit exposure of MF investors to undue volatility and potential price distortions.