The Role of REITs and InvITs in a Diversified Indian Portfolio

Real estate and infrastructure are undeniably the bedrock of any thriving economy. However, directly investing in these sectors can be a formidable task for the average retail investor, often requiring substantial capital, grappling with illiquidity, and navigating complex management. This is where Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) step in, offering a modern, accessible, and often more efficient way to gain exposure to these high-growth sectors in India.

These instruments have steadily gained traction in the Indian market, presenting compelling opportunities for portfolio diversification and stable income generation. As a leading CA firm in Mumbai, CA Sweta Makwana & Associates guides investors through these innovative avenues, helping them build robust and well-rounded portfolios.

What are REITs and InvITs? Demystifying the Concepts

Think of REITs and InvITs as a financial bridge connecting individual investors to large-scale, income-generating properties and projects that were once the exclusive domain of institutional investors.

1. REITs (Real Estate Investment Trusts)

Concept: A REIT is a company that owns, operates, or finances income-producing real estate. In essence, it’s like owning a small piece of a large, professionally managed portfolio of commercial properties, without the hassles of direct ownership.
Underlying Assets: Primarily completed, revenue-generating commercial properties such as office spaces, shopping malls, warehouses, business parks, and even data centers.
Indian Mandate: As per SEBI regulations, Indian REITs are mandated to invest at least 80% of their assets in completed, revenue-generating properties. Crucially, they must distribute at least 90% of their net distributable cash flows to unitholders annually.
How they work: You buy “units” of a REIT, which are traded on stock exchanges, similar to buying shares of a company.

2. InvITs (Infrastructure Investment Trusts)

Concept: Similar in structure to REITs, InvITs invest in operational infrastructure assets that generate stable cash flows over time. It’s like owning a share in a basket of diversified infrastructure projects.
Underlying Assets: Focus on infrastructure projects like toll roads, power transmission lines, pipelines, renewable energy plants, telecom towers, bridges, and even airports.
Indian Mandate: Like REITs, Indian InvITs are mandated to invest at least 80% of their assets in completed, revenue-generating infrastructure projects and must distribute at least 90% of their net distributable cash flows to unitholders.
How they work: You buy “units” of an InvIT, which are also traded on stock exchanges.

Why Consider REITs and InvITs for Your Diversified Indian Portfolio?

These instruments offer several compelling advantages that make them valuable additions to a modern investment portfolio:

Accessibility & Affordability: Direct real estate or infrastructure investment demands significant capital. REITs and InvITs fractionalize ownership, allowing retail investors to participate with much smaller amounts, buying units through a demat account.
Portfolio Diversification:
- Sectoral Diversification: They provide exposure to real estate and infrastructure, sectors that often have a low correlation with traditional equity markets. This can help reduce overall portfolio volatility.
- Asset-Level Diversification: Each REIT or InvIT typically holds a portfolio of multiple properties or projects, spreading risk across various assets and geographies.
Regular Income Stream: The mandatory distribution of at least 90% of their net distributable cash flows ensures a consistent income stream for unitholders, making them attractive for income-seeking investors. This income can come in the form of dividends, interest income, or repayment of debt.
Professional Management: The underlying assets are managed by experienced fund managers and operators, who handle acquisitions, operations, maintenance, and compliance. This removes the operational burden from individual investors.
Liquidity: Unlike direct property, which can take months or years to sell, REIT and InvIT units are traded on stock exchanges, offering far superior liquidity.
Transparency & Regulation: Both REITs and InvITs are regulated by SEBI (Securities and Exchange Board of India). They operate under strict disclosure norms, providing a higher level of transparency compared to traditional, unorganized real estate investments.
Inflation Hedge: Rental income from commercial properties and user fees from infrastructure projects often have clauses for periodic adjustments, which can help in hedging against inflation over the long term. Property values also tend to appreciate with inflation.

Understanding the Risks Involved

While offering unique benefits, it’s crucial to be aware of the associated risks:

Interest Rate Risk: Changes in prevailing interest rates can impact the value of REIT/InvIT units. Higher interest rates can make fixed-income investments (like FDs) more attractive and increase borrowing costs for the trust.
Market Risk: As listed instruments, their unit prices are subject to stock market fluctuations and overall investor sentiment.
Property/Project-Specific Risk: Despite diversification, the performance of a REIT/InvIT is ultimately tied to the health of its underlying assets (e.g., vacancy rates in office parks for a REIT, or traffic volumes for a toll road InvIT).
Regulatory & Policy Risk: Changes in government policies, taxation, or sector-specific regulations can affect their performance.
Liquidity Risk (for specific issues): While generally liquid, some smaller or less traded REIT/InvIT issues might have lower trading volumes.

Taxation of REITs & InvITs in India (Simplified Overview)

The taxation of distributions from REITs and InvITs in India can be nuanced and depends on the source of the income for the trust:

Interest: If the distribution is from interest income received by the trust from its Special Purpose Vehicle (SPV), it is taxable in the hands of the unitholder at their applicable income tax slab rate. TDS (Tax Deducted at Source) may apply.
Dividends: If the distribution is from dividends received by the trust from its SPV, it is taxable in the hands of the unitholder at their applicable income tax slab rate. TDS may apply.
Repayment of Debt: If the distribution represents a repayment of debt by the SPV to the trust, it is generally considered a return of capital and is tax-free in the hands of the unitholder.
Capital Gains:
- Short-Term Capital Gains (STCG): If units are sold within 36 months of purchase, gains are taxed at 15% (if Securities Transaction Tax – STT – is paid).
- Long-Term Capital Gains (LTCG): If units are sold after 36 months, gains exceeding ₹1 lakh in a financial year are taxed at 10% (if STT is paid).

Key Takeaway: The tax treatment is not as straightforward as a fixed deposit. It’s crucial to understand the source of distributions to correctly calculate your tax liability. Professional advice is highly recommended.

How to Invest in REITs & InvITs in India

Investing in REITs and InvITs is relatively simple:

Open a Demat account and a trading account with a SEBI-registered broker.
You can then buy and sell units of listed REITs and InvITs on Indian stock exchanges (NSE and BSE), just like buying shares.
Some mutual funds or Exchange Traded Funds (ETFs) are also emerging that specifically invest in REITs/InvITs, offering an indirect route.

The Indispensable Role of a CA / Financial Advisor

Integrating REITs and InvITs into your portfolio requires careful consideration of your individual financial goals, risk profile, and liquidity needs. CA Sweta Makwana & Associates can provide invaluable guidance:

Suitability Assessment: We help determine if REITs/InvITs align with your investment objectives and risk appetite.
Tax Optimization: We provide clear advice on the complex tax implications of distributions and capital gains, helping you maximize your post-tax returns.
Asset Analysis: We assist in analyzing the underlying assets, management quality, and financial health of specific REITs/InvITs.
Portfolio Integration: We guide you on how to effectively integrate these instruments into your broader diversified portfolio alongside equity, debt, and other asset classes.
Ongoing Monitoring: We offer advice on regularly reviewing your investments to adapt to market changes and ensure continued alignment with your goals.

Conclusion

In 2025, REITs and InvITs present an excellent opportunity for Indian investors to diversify their portfolios, gain exposure to institutional-grade real estate and infrastructure, and benefit from stable income streams and potential capital appreciation. While they offer unique advantages over direct property ownership, understanding their structure, inherent risks, and complex tax implications is crucial. With the right knowledge and professional guidance, these instruments can play a significant role in building a robust and resilient diversified portfolio.

Looking to optimize your investment portfolio with smart, modern avenues? For expert financial planning and investment advisory, get in touch with CA Sweta Makwana & Associates today. We are committed to empowering your financial growth.

Explore our Financial Planning Services for comprehensive support in wealth creation.