REITs to Be Treated as Equity from January 2026: What Investors Should Know

Introduction

Starting 1 January 2026, investments i

n real-estate trusts (REITs) by mutual funds and specialized funds will be classified as equity. This regulatory update by the market regulator brings a significant shift in how REITs are viewed within fund portfolios. The change aims to open up REITs to a broader investor base and align with global practices.

What’s Changing: REIT Classification

Regulatory update

The Securities and Exchange Board of India (SEBI) has reclassified REITs such that any holdings by mutual funds (MFs) or specialized investment funds (SIFs) will now count as equity investments.

The reclassification follows amendments to the SEBI (Mutual Funds) Regulations, 1996, approved in September 2025.

Grandfathering clause

If debt funds already hold REITs before 31 December 2025, they can keep them for now.

This is called grandfathering, meaning they don’t need to sell immediately — but might slowly reduce or adjust later.

Index inclusion timeline

REITs will be eligible for inclusion in equity indices only from 1 July 2026, giving a six-month transition period.

Why This Reclassification Is a Big Deal

• Better alignment with global norms

REITs offer liquidity, regular income, and price volatility — traits closer to equities than debt. The re-classification aligns Indian REIT norms with international standards.

• Enhanced participation by equity funds

Equity-oriented mutual funds and index funds will now be free to allocate to REITs, expanding the potential investor base beyond niche debt or hybrid schemes.

• Improved liquidity and demand

With classification lifted, demand for REIT units may rise, improving liquidity in markets for listed REITs. Broad fund participation could reduce price volatility over time.

How the New Rules Impact Mutual Fund Investors

• Indirect access to real estate -Investors in equity mutual funds may now get exposure to commercial real estate via REIT allocations, without dealing with physical property.

• Balanced risk-return profile -REITs can offer rental income plus capital appreciation, combining income generation with growth potential under the equity classification.

• Portfolio diversification -REITs may behave differently than traditional equities, offering a diversification benefit within equity portfolios.

• Increased transparency -Classification under equity requires schemes to report REIT holdings like stocks, improving clarity for investors.

What to Watch Out For & Cautions

• Volatility remains — REIT valuations can move with interest rates, real estate demand, and macroeconomic conditions. Classification as equity does not eliminate these risks.

• Fund-house decisions will vary — Not all mutual funds may increase REIT exposure immediately; allocations will depend on their strategy and risk appetite.

• Grandfathered holdings may be phased out — Debt-scheme investors should check whether their fund house plans to divest REIT holdings gradually.

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Conclusion

SEBI’s decision to reclassify REITs as equity from January 2026 is a structural change with wide implications. It allows broader participation by mutual funds, enhances liquidity, and opens the door for retail investors to access real-estate assets via equity funds. For investors, REITs could now offer a hybrid of income and growth — but fundamentals remain real estate dependent.

FAQ

Q: From when will REITs be treated as equity in mutual funds?

A: From 1 January 2026.

Q: What happens to REITs already held by debt schemes?

A: Existing REIT holdings as of 31 December 2025 are grandfathered; fund houses may divest them over time.

Q: Will REITs be included in equity indices immediately?

A: No. They will become eligible for index inclusion only from 1 July 2026.

Q: Will infrastructure funds (InvITs) also be reclassified?

A: No. InvITs will continue to be classified as hybrid instruments.

Q: How could this change benefit ordinary investors?

A: It may provide diversified exposure to real estate via equity mutual funds, combining potential rental yield and capital growth under a regulated framework.