REITs To Classify As Equity From Jan 1, 2026, Here’s What Changes For Mutual Fund Investors

From January 1, 2026, the Securities and Exchange Board of India (Sebi) will officially classify real estate investment trusts (REITs) as equity for mutual funds. On paper, it looks like a technical change. In reality, it could quietly shift how fund managers can use REITs, and how investors should think about them.

What are REITs

Think of REIT as a listed, professionally managed real-estate business. They own office parks, commercial buildings, and large rental assets. The rent they earn is distributed to investors, which is why many people often viewed REITs as a semi–fixed-income product. Investors can invest in them without actually buying real estate.

But REITs also trade on the stock exchange. Their prices move with market sentiment, interest rates and the overall health of India’s commercial real-estate cycle. So going by what analysts believe, they have always behaved like equity, but just not treated like it within the mutual fund categories.

What Changes Now

The move by Sebi brings clarity.

Prasenjit Paul, equity analyst at Paul Asset and fund manager of 129 Wealth Fund says REITs were always traded like equity and reacted to the same market fundamentals. However, mutual funds often placed them in hybrid or thematic buckets. 

“With REITs now formally treated as equity, fund managers especially in large-cap, flexi-cap and multi-cap categories, can take exposure more freely within category limits,” says Paul.

For investors, this means REITs will no longer be seen as a yield product tucked inside hybrid funds. Instead, they will show up more naturally in mainstream equity schemes.

Paul adds, “REITs will increasingly be viewed as a listed equity exposure to India’s real-estate and rental-income cycle. Over time, this shift may also help deepen liquidity in the REIT market as mutual fund participation becomes more stable.”

REITs to Classify as Equity: Pros and Cons for Mutual Fund Investors

The benefits are fairly straightforward.

Adds Paul: “Classifying REITs as equity ensures uniformity in valuation, disclosures and risk-mapping. Economically, REITs behave more like equity-linked real-estate instruments, so the new classification aligns better with how they function in the market.”

More importantly, for investors, REIT access won’t be restricted to the niche hybrid categories anymore. These allocations can now sit comfortably inside the same funds you already invest in.

Institutional participation, according to analysts, may also improve. 

The major downside, according to Paul, is investor expectation. 

Says Paul: “REITs were often associated with steadier, yield-driven returns. However, now that they sit in the equity bucket, their performance will naturally be compared with broader equity indices and that may not always reflect how REITs are meant to behave.”

Hybrid funds may have some near-term adjustments as they replace REITs with other income-oriented instruments. As far as risk and returns are concerned, in diversified equity mutual funds, says Paul, REITs can add a small diversification benefit since their return drives occupancy trends, rental cycles and asset valuations, which are different from typical equity sectors.

So, there will be a little diversification benefit, but nothing that will change the character of the equity fund.

Overall, Sebi’s move makes REIT participation in equity funds more transparent. Investors who liked the idea of rental-income exposure but did not want to buy REITs directly may now find it in their equity schemes, depending on how the fund manager structures the portfolio.