Shariah Compliant Mutual Funds

These funds are specifically designed to adhere to the guidelines set by Shariah law, ensuring that investments are made in socially responsible and ethically sound companies. By avoiding industries like alcohol, gambling, and banking involving interest (riba), Shariah-compliant funds provide a way for investors to align their financial goals with their faith and values.

Why Choose Shariah Compliant Mutual Funds?

Whether you are seeking a halal investment option or want to support socially responsible businesses, these funds offer a trusted and regulated path to achieving your financial goals. Here’s how —

• Ethical Investing: These funds cater to investors who wish to align their financial objectives with their religious and ethical values
• Halal Investment Opportunity: Shariah based mutual funds provide a way to grow wealth while avoiding haram (forbidden) income sources
• Accessible to All: While primarily designed for Muslim investors, these funds are open to non-Muslim investors as well who seek ethical, socially responsible investment

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Key Features of Shariah Based Mutual Funds

Here are the reasons why investors prefer halal mutual funds —

• Shariah Law Adherence: Shariah-compliant mutual funds strictly follow Islamic law, which prohibits investment in industries such as —
   
  • Alcohol
  • Gambling
  • Pork-related products
  • Weapons and military goods
  • Tobacco
  • Pornography 
    
    The funds ensure that no investments are made in these sectors to maintain compliance with Shariah guidelines.
     
• No Interest (Riba): Muslims are prohibited from earning or paying interest (riba) as per the Quran. Therefore, halal mutual funds avoid companies involved in interest-based transactions, including traditional banks that charge interest. Instead, any potential interest income is donated to charity to maintain the fund’s halal status.
   
• Positive and Negative Screening:
   
  • Positive Screening: This process selects companies engaged in lawful, ethical businesses such as technology, healthcare, and manufacturing
  • Negative Screening: This ensures companies involved in non-compliant activities (e.g., those dealing in riba or harmful products) are excluded from the fund
     
• Shariah Board Oversight: A group of qualified Shariah scholars and financial experts monitors and certifies that the fund adheres to Islamic principles. The Shariah board conducts regular audits to ensure the fund remains compliant
   
• Ethical Investments: Halal mutual funds prioritise ethical investments that contribute positively to society. They avoid ventures that could harm the environment or people, ensuring all investments align with the values of fairness and social responsibility
   
• Diversification: These funds diversify their portfolios across a range of industries, minimising risks and enhancing potential returns. The focus is on companies with solid financial practices and low debt levels to ensure stability and reduce speculative investments
   
• Debt-Free Investing: Since Islamic law promotes financial stability and forbids taking on excessive risk, Shariah-compliant mutual funds don’t invest in businesses with high debt levels
   
• Purification of Earnings: Funds undergo a purification process where any earnings deemed non-compliant with Shariah are identified and donated to charity. This ensures that the investment remains pure and aligned with Islamic principles
   
• Sukuk Investments: Sukuk, or Islamic bonds, are commonly included in these funds. Sukuk are structured to comply with Islamic law by involving profit-sharing rather than interest-based income
   
• Transparency and Regular Audits: Transparency is crucial in Shariah-compliant funds. Regular reporting and audits are conducted to ensure that the fund’s operations remain in full compliance with Shariah principles, offering investors clarity and confidence in their investments

Limitations for Mutual Funds As Per Shariah Law 

Below are the key restrictions that a mutual fund must adhere to in order to be considered Shariah-compliant —

1. Interest-Free Income (Riba-Free):

Shariah-compliant mutual funds avoid investing in companies that earn significant income from interest-based transactions (Riba). Although it is difficult to find companies that are 100% interest-free, funds can invest in companies where interest-based income is limited to no more than 3% of total income.

2. Debt-to-Asset Ratio:

The fund cannot invest in companies with a debt-to-asset ratio exceeding 25%. This requirement ensures that the companies being invested in are financially stable and do not have excessive debt, which is forbidden under Shariah law.

3. Restricted Industries:

Certain industries are completely prohibited for Shariah-compliant investments. These include —

Financial services that deal with interest (e.g., conventional banks, insurance companies)

Companies involved in unethical activities, such as the manufacture and sale of alcohol, tobacco, pork, and products associated with gambling, pornography, and other immoral activities

4. Profit-and-Loss Sharing:

Shariah-compliant funds often focus on businesses that follow profit-and-loss sharing arrangements rather than interest-based profit generation. This is in line with Islamic principles of fairness and shared risk.

5. Asset-Backed Investments:

To ensure transparency and minimise speculative activities, Shariah-compliant mutual funds focus on asset-backed investments. These investments are supported by tangible assets and avoid excessive speculation.

What are Different Shariah-Compliant Mutual Funds?

Shariah-compliant funds allow Muslim investors to align their investments with Islamic principles. 

Below are some key Shariah-compliant mutual funds operating in India —

1. Tata Ethical Fund - Regular Plan Growth

Focus: This Shariah mutual fund invests primarily in equity and equity-related instruments of companies that strictly follow Shariah principles.

Objective: Aimed at long-term capital appreciation, it avoids exposure to conventional banks and financial institutions.

Key Features: The fund focuses on ethical investment and ensures that only companies adhering to Islamic law are included in the portfolio.

2. Taurus Ethical Fund

Focus: Like the Tata Ethical Fund, Taurus Ethical Fund invests in Shariah-compliant equity and equity-related instruments.

Objective: It aims for long-term capital growth while excluding industries prohibited under Islamic law, such as banking, finance, and other unethical sectors.

Key Features: The fund is designed for investors seeking to follow Islamic principles while investing in ethical stocks.

3. Nippon India ETF Shariah BeES (Also Reliance ETF Shariah BeES)

Focus: This Exchange Traded Fund (ETF) tracks the Nifty50 Shariah Index, investing in securities that meet Shariah criteria.

Objective: It provides a way to invest in a broad market portfolio that aligns with ethical considerations, suitable for medium to long-term investors.

Key Features: The ETF mirrors the Nifty50 Shariah Index, offering a diversified, easy-to-trade option for investors.

Fund Returns 

Here’s the annualised return of different Shariah compliant mutual funds —

Note: The returns are updated frequently. Therefore, it is preferable to check them before making a decision.

Key Shariah Indices

Shariah based mutual funds often use these indices as benchmarks to track performance —

• S&P CNX Nifty Shariah: This index tracks the 50 largest Shariah-compliant companies listed on the NSE
• S&P CNX 500 Shariah: A broader index of 500 Shariah-compliant companies, offering a more extensive representation of the market

Factors to Consider Before Investing in Shariah-Compliant Mutual Funds

1. Returns:

It is essential to assess the historical performance of Shariah-compliant funds and compare their returns to conventional funds, both in the short-term and long-term. This will help investors understand potential growth and risks.

2. Liquidity:

Before investing, ensure that the mutual fund has adequate liquidity. This allows you to buy and sell units without impacting your investment strategy.

3. Limited Investment Options:

Shariah-compliant mutual funds restrict investments to certain industries, which can reduce the number of available investment opportunities. However, this ensures the fund remains in compliance with Shariah law.

4. Higher Costs:

Due to the additional compliance requirements, Shariah mutual funds may have higher management fees and expenses compared to conventional funds. It's important to assess these costs before investing.

5. Restrictive Decision-Making:

Fund managers of Shariah-compliant funds have limited flexibility when selecting investments, as they must adhere to Islamic guidelines. This may impact the fund’s performance and decision-making process.

Tax Treatment of Shariah Mutual Funds

Shariah-compliant funds do not offer any special tax benefits. 

These funds primarily invest in equities, so they are taxed according to the rules for equity-oriented schemes. Here’s a breakdown —

• Short-Term Capital Gains (STCG): If you sell your units within 1 year, the gains are considered short-term and are taxed at 20%
• Long-Term Capital Gains (LTCG): If you hold your units for more than 1 year, the gains are classified as long-term and are taxed at 12.5%. However, there is an exemption of up to INR 1,25,000 in long-term capital gains per financial year

Frequently Asked Questions