Summary of this article
NSE allows REITs in indices for new mutual funds.
Mutual funds simplify taxes and reduce commercial investment costs.
Investors should treat REIT funds as volatile equity instruments.
On July 13, NSE Indices, a subsidiary of the National Stock Exchange, announced that Real Estate Investment Trusts (REITs) will be considered eligible for inclusion in Nifty indices.
This, in turn, is expected to allow mutual fund houses to launch schemes which are REIT-focused or revise their schemes to include REITs in existing indices. Notably, this development follows another rule change announced on January 1, in which the Sebi re-classified REITs as equity instruments.
The inclusion of REITs in indices is expected to open the doors for mutual fund houses to launch REIT-focused schemes, making investment in commercial real estate possible via the mutual fund route. Edelweiss Mutual Fund has already filed a draft offer document with Sebi for the Edelweiss Nifty REITs and Realty Index Fund. The fund house plans to launch an open-ended index fund which will track the Nifty REITs and Realty Total Return Index.
Typically, investment in commercial real estate requires a lot of capital, which makes the ticket size of investment prohibitively high for retail participants. However, gaining exposure to the same via mutual funds can significantly reduce the ticket size, making investment in real estate easier for retail investors.
While the equity reclassification makes REITs function similarly to stocks in terms of portfolio allocation and taxation, the index inclusion is also likely to get them investment from passive index funds, which in turn can increase liquidity and improve price discovery for the underlying commercial assets.
Radhika Gupta, MD & CEO at Edelweiss Asset Management, explained how wrapping REITs inside an equity mutual fund simplifies the tax experience compared to buying them directly.
"Direct REIT investors face multiple tax treatments - dividends are taxed at slab rates, debt repayments are tax-free, and capital gains are taxed separately. Through a mutual fund structure, investors will face a single capital gains tax at redemption, making taxation simpler and potentially more efficient on a blended basis," Gupta said.
Demystifying REIT Mutual Funds
With the anticipated launch of REIT-focused mutual funds, investors are likely to wonder whether they should buy into these new funds if they already have exposure to real estate assets. Manasvi Garg, a Sebi-registered investment advisor (RIA) and CFA, pointed out that investors should make the decision based on their goals rather than considering whether they already have exposure to physical real estate or not.
"Whether an investor should allocate to REITs or Realty mutual funds ultimately depends on their overall asset allocation, financial goals and risk appetite rather than simply whether they already own physical real estate," Garg said.
A REIT-focused mutual fund scheme can potentially combine yield from REITs with growth-oriented realty developer stocks. Gupta said that the existing REIT index combines yield-generating REITs with cyclical realty developer stocks, improving the investor's risk-return profile.
"The index currently combines around 60 per cent REITs and 40 per cent real estate stocks. REITs provide stable income and lower volatility, while realty stocks offer growth potential. This blend balances income and capital appreciation, resulting in significantly lower volatility than a pure real estate stock portfolio. Over a longer period, as we have more publicly listed REITs, the exposure to REITs will keep increasing," Gupta said.
Notably, REITs are mandated by regulators to distribute a portion of their cash flows to investors in the form of dividends. Garg highlighted the specific distribution requirements that make these instruments attractive for yield-seeking investors.
"Indian REITs are also required to invest at least 75 per cent of their assets in completed income generating real estate and distribute 90 per cent of their net distributable cash flows to unitholders, supporting a stable income stream," Garg said.
Garg mentioned that the regulatory oversight of these assets provides an additional layer of structure as they are professionally managed and governed by Sebi’s regulations.
"Investors also often overlook that REITs own diversified commercial portfolios managed by professional managers and are subject to Sebi’s regulatory framework, including the requirement to distribute 90 per cent of net distributable cash flows to investors," Garg said.
However, investors must note that in a standard growth option mutual fund, the asset management company reinvests the REIT dividends back into the fund to increase the net asset value (NAV) automatically over time.
Clarifying how these index funds will handle the mandatory dividend payouts from the underlying REITs, Gupta pointed out the compounding advantage for investors.
"Distributions received from underlying REITs are automatically reinvested into the portfolio in line with the index methodology. This keeps investors fully invested, preserves index tracking efficiency, and allows returns to compound without requiring investors to manually reinvest payouts," Gupta said.
Additionally, as the underlying commercial properties appreciate and realty developers grow their order books, the constituent stock prices rise, driving up the fund's overall value. On the other hand, the dividend option provides investors with dividend payouts.
One of the key advantages offered by REIT-focused mutual funds is the ability to engage in micro investing for macro assets, as retail investors can own a fraction of Grade A tech parks and premium malls with more liquidity than actually owning physical assets, which have a longer price discovery and lower liquidity.
Investors can sell their holdings without engaging in the process of looking for buyers for their physical property because mutual fund units can be redeemed on any business day. REIT-focused schemes are also likely to offer investors diversification as they will be able to bet on a broad basket of the country's top real estate projects as opposed to owning a single commercial real estate asset.
Garg pointed out the performance metrics of the underlying Nifty REITs & InvITs Total Returns index over the past five years and mentioned that the index has delivered 12.79 per cent returns (Compounded Annual Growth Rate).
"The Nifty REITs & InvITs Total Returns Index has generated a 5-year CAGR of 12.79 per cent, with a dividend yield of 4.83 per cent, annualised volatility of 8.89 per cent over 5 years, and a 5-year correlation of just 0.21 with the Nifty 50, demonstrating its potential to provide income and diversification alongside traditional equity holdings," Garg said.
The REIT Reality Check
Despite the advantages of REIT-focused mutual funds, there are some things investors must know before allocating their capital. Despite the dividend payouts and steady returns, investors must remember that REITs themselves are an equity product. As REITs are equities, their net asset value can fluctuate daily with the movement of the stock market.
Due to this, financial planners warn against treating these funds like traditional real estate. Garg emphasised that these funds have a very specific place in an investor's portfolio and should be treated as equities instead of real estate.
"Effective 1 January 2026, Sebi classified REITs as equity for mutual fund purposes, reflecting their market-traded nature and long-term growth characteristics. However, they should not be viewed as a substitute for debt because their prices remain sensitive to interest rates, property market fundamentals and broader economic conditions," Garg said.
Retail investors transitioning from physical property to market-linked real estate funds often carry behavioural biases like anchoring to past residential property appreciation. Garg pointed out the psychological hurdles investors face when entering this space.
"Behavioural biases such as anchoring to past residential property appreciation, home bias and loss aversion can lead investors to evaluate REITs like physical assets rather than market-linked investments, despite their very different risk-return characteristics," Garg said.
He also highlighted the most common error retail investors make when evaluating this category.
"The biggest misconception is believing that REITs behave like physical property simply because they invest in real estate. Unlike residential property, REITs are listed securities whose prices fluctuate daily based on interest rates, rental expectations and market sentiment," Garg said.
Ultimately, the new REIT-focused mutual fund schemes are expected to provide investors a new way of diversifying their portfolio, allowing them to own a fraction of the commercial skyline in a regulated structure.
