Context:
SEBI has proposed raising mutual fund investment limits in REITs and InvITs from 10% to 20%.
- Objective: Channel more long-term capital into real estate and infrastructure sectors
- Intended to enhance fund manager flexibility and attract broader investor participation
Current Market Realities
- Mutual fund exposure in REITs and InvITs is currently <0.3% of total AUM
- India has only four listed REITs and 18 InvITs, of which just 8 InvITs are actively traded
- Daily trading volumes are low; for example, Embassy REIT trades around ₹41 crore per day
- Many InvITs have micro-cap-like free float, reducing market liquidity
Liquidity and Valuation Challenges
- Increasing investment limits prematurely could lead to liquidity traps
- Thinly traded instruments risk NAV distortion and exit challenges for mutual funds
- During market stress, bulk sell-offs may trigger price crashes due to lack of buyers
- NAVs may become inaccurate due to stale or delayed disclosures by REITs/InvITs
Hybrid Nature and Classification Issues
- REITs/InvITs are neither true equity nor fixed income instruments
- Mandated to distribute 90% of income, limiting growth via reinvestment
- Sensitive to macroeconomic and interest rate changes, like bonds, but perpetual in nature
- Investor expectations and suitability need clearer positioning
Strategic Recommendation
- Rather than raising caps immediately, SEBI and stakeholders should focus on:
- Deepening market liquidity and transparency
- Promoting market-making and improving price discovery
- Increasing retail and HNI participation
- Enhancing awareness of risk-return profiles of REITs and InvITs
- Limit hikes should be considered only after significant utilization of current limits
