The Securities and Exchange Board of India board is expected to discuss the issue of allowing mutual funds into real estate at its meeting this week.
The regulator has also sought the comments of the finance ministry on the issue.
However the move is different from the proposal to allow real estate-based mutual funds to set up shop in the country, which has been hanging fire for quite some time.
Instead, Sebi is considering allowing the existing mutual funds to invest a percentage of their asset in real estate.
Commenting on the issue, CB Richard Ellis south Asia managing director Anshuman Magazine said, "Sebi should allow such real estate mutual funds because it will induce much required liquidity in the real estate market.
Also, through such real estate mutual funds, a lot of small investors will be able to participate in the real estate sector".
A real estate mutual fund typically means that some investors, including financial institutions or investors, pool their money together and that fund then invests in real estate.
It could either be a sector specific real estate mutual fund, which invests in hotels, commercial buildings or entertainment or it could have a portfolio, could deal in mortgage or maybe just buy and sell properties.
Instead of an individual investing in real estate, a real estate mutual fund is a collection of investors who invest in real estate.
However, Magazine added that there could be a lot of hurdles to clear before the proposal was given a go-ahead. Apart from the legal hurdles, even the fundamentals need to change, he said.
"The stamp duties need to reduced, Urban Land Ceiling Regulation Act needs to be repealed and property taxes need to be reduced".
Yet another hurdle in India is the scarcity of properties with clear ownership titles, clear completion certificate and lack of transparency in real estate transactions.
While the government has come round to the view that a boost for the real estate sector was dependent on the flow of fresh funds, several mutual funds have also found their portfolios sluggish as the stock market has not perked up.
Given the strong real estate bias of the small investors, the funds feel that a portfolio based on that platform would fetch a better response from the market.