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Shariah Compliant Funds – Everything You Need To Know About It

  • Amber Jain
  • Feb 12 2022
  • 5 minutes
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An investment strategy that is consistent with our beliefs may help in staying true to our conscience, but could it be a profitable approach? There are various mutual fund categories that follow socially responsible investing techniques. Shariah compliant mutual funds are one such socially responsible investment that is based on the Shariah or Shariat law of the Muslim religion. These mutual funds follow the Shariah law, which is considered a moral code in Islam.

Here, we will explore the concept of Shariah funds and share recommended mutual funds in this category.

What is Shariah law?

Islamic law, also known as the Shariah law, is a religious law that is part of the Islamic religion. This concept is derived from the religious precepts of Islam, specifically the Quran and the hadith. The term Shariah, in Arabic, refers to God’s divine law.

How does investing as per the Shariah law work?

The Shariah law has certain restrictions with regard to the businesses that can be pursued via an investment. Some of these are as follows:

  1. High-Risk activities like gambling: According to one of the main principles of Islamic law, gambling is considered a sin and should be avoided. Therefore, individuals who follow the Islamic law should not enter any business that carries a high-risk equivalent to gambling.
  2. Ban on interest payment: In Islam, taking a loan on interest is considered as unlawful. The religion considers interest payment as morally unjust and unfair. This is why many businesses tend to rely on partnerships and ownerships while sharing profits/losses instead of borrowing or lending.
  3. Restricted businesses: Investments as per Shariah law have to follow the restriction of investing in certain types of businesses. These include businesses such as gambling, alcohol, tobacco, drugs, etc since these are considered immoral.

What are the factors to be considered while investing as per Shariah law?

Similar to any socially responsible fund within the environmental, social, and governance (ESG) universe, Shariah funds filter potential portfolio investments by considering specific requirements as per the Islamic law. Shariah funds do not invest in companies dealing with gambling or the production of weapons and alcohol. Here are some of the other important factors associated with Shariah funds:

  • Shariah funds invest in private equity, real estate, and also exchange-traded funds.
  • The funds appoint Islamic scholars as advisors for making investment decisions.
  • As per a report published by PricewaterhouseCooper (PwC) in 2011, Shariah-compliant funds grew at an annualized rate of 26% through the first ten years of the 21st century.
  • Since a majority of the investment is done through private placement, it can be relatively difficult to estimate the industry’s size or valuation. These funds are not traded in secondary markets, thereby providing little insight into the fund compositions.
  • The funds involve significant effort in terms of the level of attention towards compliance, as there are extensive sets of rules and requirements under the Shariah principles.
  • These rules can contribute to the complexity and costs of a Shariah-compliant fund.

Shariah Compliant funds 2021

Here are the Shariah fund recommendations for 2021 are:

  1. TATA Ethical Fund

About the Fund

The fund aims to generate medium to long-term capital gains through investments in Shariah compliant equity and equity related instruments. The fund selects well researched value and growth oriented companies for investment. The fund has 93.53% investment in Indian stocks. Out of this, 53.33% is invested in large-cap stocks, 19.46% is in mid-cap stocks and 18.07% in small-cap stocks.

Inception Date Jan 1, 2013
Benchmark Name NIFTY 500 Shariah Total Return Index
Fund Manager Ennette Fernandes
Expense Ratio 1.26%

Historical Returns of the Fund (annualised)

1-Year 2-Year 3-Year 5-Year Since Inception
54.95% 33.04% 18.40% 15.19% 16.77%
  1. Taurus Ethical Fund

About the Fund

The fund’s objective is to provide capital appreciation and regular income to unitholders through investment in a diversified portfolio consisting of equities. The investments are selected based on the principles of Shariah. Fund comprises 93.64% of Indian stocks, of which 36.27% investment is in large-cap stocks, 32.67% is in mid-cap stocks and 20.4% in small-cap stocks.

Inception Date Jan 1, 2013
Benchmark Name S&P BSE 500 Shariah Total Return Index
Fund Manager Prasanna Pathak
Expense Ratio 1.37%

Historical Returns of the Fund (annualised)

1-Year 2-Year 3-Year 5-Year Since Inception
40.49% 28.50% 15.20% 14.38% 18.41%

Conclusion

Shariah compliant mutual funds are ideal for investors looking for a socially responsible form of investing, specially based on Islamic laws. Due to the restrictions on the investments as governed by the Shariah law, the funds have a narrow investment focus. Thus, the returns are bound by the performance of specific sectors or compliant companies as shortlisted by Shariah funds. An investor should therefore invest in these only after considering all the pros and cons.

FAQs

  1. What are faith based funds?

Faith based funds are intended for investors who wish to invest money in accordance with a specific faith. For example, Islamic investors looking to invest in line with Shariah principles can opt for Shariah mutual funds.

  1. How to invest in Shariah mutual funds?

To invest in any mutual funds, including Shariah mutual funds, an investor can download the Finity app on his/her smartphone. The app allows a seamless investment process across a wide variety of funds that can be selected based on risk, return, and also faith preferences.

  1. Which are the commonly invested mutual fund categories?

Some of the common mutual fund categories preferred by investors include equity funds, bond funds, and money market funds.

  1. Should I invest in mutual funds when the market is high?

An investor must time a mutual fund investment depending on personal financial goals and preferences. Timing the market may not necessarily work, therefore, it is safer to focus on fund selection instead of market fluctuations.

  1. Are mutual funds safer than stocks?

Mutual funds may be safer than stocks for new investors who are unfamiliar with market behaviours and patterns. Individual stock investment also limits the exposure to a single company/sector as compared to a mutual fund, which allows a wider exposure across different stocks.

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