Time to rethink Reits after Sebi update?

Last week, the Securities and Exchange Board of India (Sebi) agreed to reclassify real estate investment trusts (Reits) as equity instruments.

- Shipra Singh [e-mail]

This allows mutual funds to increase their allocation to Reits alone up to 10% (single issuer limit) of their net asset value.

This change raises an important question-will this affect how small investors approach Reits? Should they invest directly or via mutual funds?

At first glance, the move seems significant. With the broader allocation limit, hybrid equity funds like balanced advantage funds, flexicap funds, and multi-asset allocation funds may increase their Reit exposure. However, experts say that for retail investors, the choice between direct ownership and mutual funds depends on investment goals, tax implications, and ease of access.

The reclassification does not fundamentally alter how retail investors should decide between direct Reit investments or mutual funds, said Abhishek Kumar, an investment adviser registered with Sebi and founder of SahajMoney.

The biggest advantage of investing in Reits directly for small investors is the tax-free dividend income. A majority of Reit distributions come in the form of dividends, which are nontaxable in the hands of unit holders.