The market regulator has proposed increasing the limit that mutual funds can invest in real estate investment trusts (REITs) and infrastructure investment trusts (InvITs).
In a consultation paper released on April 17, the Securities and Exchange Board of India (SEBI) has suggested that MF schemes' exposure to REITs and InvITs issued by a single entity be doubled from 5 percent of NAV of fund to 10 percent.
The paper has also suggested that the equity and hybrid MF schemes' exposure to REITs and InvITs overall be doubled from 10 percent to 20 percent; while the debt schemes' exposure to these assets overall be retained at 10 percent.
The paper said that these are being suggested to provide more avenues for investment and diversification to schemes of mutual funds, and to increase the capital flow into REITs and InvITs. Public comments and suggestions on the proposals should be sent to the regulator by May 11, 2025.
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Equity or debt?
SEBI has also suggested classifying REITs and InvITs as "equity", since they combine features of both equity and debt instruments, and therefore including them in equity indices for the purpose of investment by mutual funds. Currently, REITs and InvITs are part of both equity and debt MF schemes.
The paper said, " It is observed that globally, in some jurisdictions REITs and InvITs are classified as equity instruments, and form part of equity indices. It is also observed that Indian REITs form part of some of the global equity indices such as MSCI India Small Cap Index, FTSE India Index etc
" In view of the above, the issue was taken up with the Association of Mutual Funds in India (AMFI) and also deliberated in the Mutual Fund Advisory Committee (MFAC). Pursuant to deliberations, AMFI and MFAC were of the view that the REITs and InvITs should be classified as hybrid securities rather than as equity or debt securities, inter alia, due to difference in the structure related to their cash flows, dividends, half-yearly Net Asset Value (NAV) calculation based on valuation, voting rights limited to certain operational decisions etc. Further, it was deliberated by MFAC as to whether the inclusion of these instruments as constituents of equity indices would be appropriate and fair to investors in schemes following such indices as benchmark."
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