SEBI’s Proposal: Increased Mutual Fund Limits in REITs and InvITs

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

Mint