SEBI Reclassifies REITs as Equity Related Instruments for Mutual Fund Investments

The Securities and Exchange Board of India (SEBI) had notified the Securities and Exchange Board of India (Mutual Funds) (Second Amendment) Regulations, 2025 on October 31, 2025, reclassifying Real Estate Investment Trusts (REITs) as equity-related instruments and retaining the hybrid classification for Infrastructure Investment Trusts (InvITs) for the purpose of investments by mutual funds (MFs) and specialised investment fund (SIFs) following SEBI’s approval granted in this regard at its 211^th meeting held on September 12, 2025 (which can be accessed here).

On November 28, 2025, SEBI followed up with a circular to formally reclassify REITs as equity-related instruments for regulatory and portfolio‑construction purposes (Reclassification Circular). From January 1, 2026, any fresh investment by MFs and SIFs in listed REITs must be treated as equity, whereas InvITs will remain classified as hybrid instruments for the purpose of scheme‑level exposure limits and categorisation norms.

Key highlights of the Reclassification Circular are outlined below:

1. With effect from January 1, 2026, investments by MFs and SIFs in REITs will be classified as investments in equity-related instruments, while InvITs will continue to be categorised as hybrid instruments.

2. Existing REIT holdings in mutual fund debt schemes and SIF strategies as of December 31, 2025 are grandfathered under the previous classification (i.e. asset management companies (AMCs) need not undertake urgent divestment of holdings), avoiding an immediate breach of current scheme mandates. AMCs are, however, encouraged to gradually divest REIT holdings from debt schemes, taking into account the prevailing market conditions, liquidity and the best interests of investors.

3. The Association of Mutual Funds in India (AMFI) has been asked to include REITs in its list for classification of scrips based on market capitalisation, effectively aligning REITs with equity‑style categorisation for industry‑wide reference.

4. Inclusion of REITs in equity indices will only be permitted after a six‑month cooling‑off period, i.e. from July 1, 2026 onwards, giving index providers and market participants time to adjust methodologies and portfolios.

5. AMCs must issue an addendum to reflect the reclassification of REIT exposure in relevant scheme documents. Such updates will not be treated as a ‘fundamental attribute’ change, and therefore will not trigger unit‑holder approval processes.

Conclusion:

The Reclassification Circular is intended to support greater integration of REITs into equity portfolios, expand long‑term institutional participation in the listed real estate asset class and harmonise regulatory treatment with the underlying risk‑return profile of REIT units.