Synopsis

Edelweiss Mutual Fund's upcoming REIT-oriented index fund has sparked investor interest as India's first such passive offering. Explaining why the scheme excludes InvITs, MD & CEO Radhika Gupta said current SEBI regulations do not allow passive funds to combine equity-classified REITs with hybrid-classified InvITs.

Edelweiss Mutual Fund is set to launch India's first REITs-oriented index fund, giving investors a new way to gain exposure to the listed real estate sector through a single mutual fund. The launch has generated considerable interest. The fund provides exposure to a portfolio of listed Real Estate Investment Trusts (REITs) and leading real estate companies through a single investment.

However, it has also raised one key question — why doesn't the fund combine both Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) into a single passive scheme?

Responding to this query, Radhika Gupta, Managing Director and CEO of Edelweiss Mutual Fund, explained that the answer lies in the current regulatory framework governing passive funds.

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According to Gupta, REITs are classified as equity instruments, whereas InvITs are treated as hybrid instruments. Combining the two would change the nature of the product from an equity index fund to a hybrid index fund, which is currently not permitted under SEBI's regulations for passive funds.

Gupta posted on social media platform X that, “Since everyone is asking why not a REIT and InvIT Index Fund... REIT is an equity instrument, InvITs are hybrid... Finally, do check the presentation; the vol is just a little higher than a pure REIT fund and much lower than a pure real estate fund.”

"This is how current SEBI regulations for passive funds work," Gupta said while explaining why the fund has been designed as a REIT-focused offering.

Gupta added that the upcoming Edelweiss Nifty REITs & Realty Index Fund will primarily focus on listed REITs while allocating the remaining portion to real estate companies included in the underlying index.

She further explained that the index has been designed to gradually increase its REIT allocation as more REITs get listed in India. Over time, the fund has the potential to become predominantly, or even entirely, invested in REITs.

"Its limits of 15% are also designed to prevent single security concentration," she noted.

Addressing concerns around risk, Gupta highlighted that the volatility is just a little higher than a pure REIT fund and much lower than a pure real estate fund.

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Edelweiss Nifty REITs & Realty Index Fund will open for subscription from August 5 to August 19. The fund house describes this fund as: from skyline to portfolio, the new way to invest in Indian real estate.

The fund aims to mirror the returns of Nifty REITs & Realty Total Return Index, subject to tracking error, and at present, the composition of the index construct is nearly 60% in Indian REITs and 40% in realty stocks.

Gupta had earlier said that the fund aims to address some of the long-standing challenges associated with investing directly in real estate, including high capital requirements, illiquidity and concentration risk.

She also highlighted another key advantage of the mutual fund structure from a taxation perspective. According to Gupta, distributions received from the underlying REITs can continue to compound within the fund instead of being taxed immediately as regular payouts, potentially making the investment more tax-efficient for long-term investors.

The fund will be managed by Bharat Lahoti and Manasi Jalgaonkar. The minimum NFO subscription amount will be Rs 100 and in multiples of Re 1 thereafter.

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