Shariah- Compliant Mutual Funds

Shariah-compliant mutual funds are investment options that follow Islamic principles. They avoid interest (riba) and investments in businesses that go against Islamic ethics (haram), such as alcohol, gambling, or pork. This makes them suitable for Muslim investors who seek ethical and religiously compliant investment opportunities. This article will help you to understand Shariah-compliant mutual funds in detail.

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What are Shariah-Compliant Mutual Funds?

"Shariah" refers to the principles of Islamic law that adhere to ethical and religious guidelines of Islamic finance. The Shariah-compliant mutual funds ensure they invest in a socially responsible and ethical manner. 

Important Points to Learn About Shariah-Compliant Mutual Funds:

  • Shariah-compliant mutual funds are also known as Halal mutual funds.

  • Shariah/ Halal mutual funds avoid investing in assets that are considered haram or prohibited under Shariah law, such as alcohol, tobacco, gambling, and pork products.

  • They also prohibit earning or paying interest (riba/ usury), which is considered unethical in Islamic finance.

  • Instead, these funds generate returns through permissible means such as profit-sharing agreements and ethical investments.

  • Shariah-compliant mutual funds offer a way for Muslim investors to participate in the financial markets while aligning with their religious beliefs. This makes them a unique and ethical investment option for investors.

The aim of halal mutual funds is to provide Muslim investors with an investment option that aligns with their faith and values, allowing them to earn returns in a manner consistent with Islamic principles.

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What are the Features of Shariah-Compliant Mutual Funds?

The key features of Shariah-compliant mutual funds are as follows:

  • Ethical Investments: They avoid industries like alcohol, gambling, and pork, in line with Islamic principles.

  • No Interest: They do not engage in interest-based transactions, as interest (usury) is prohibited in Islam.

  • Asset Screening: Rigorous screening to ensure investments comply with Shariah guidelines.

  • Profit-sharing: Returns generated through ethical means, like profit-sharing agreements.

  • Transparency: Regular disclosure of investments and compliance with Shariah principles.

These features cater to Muslim investors seeking investments aligned with their faith.

What are the Restrictions on Halal Mutual Funds under Shariah Law?

Under Shariah law, halal mutual funds or Shariah-compliant mutual funds must comply with certain restrictions and principles, which are as follows:

  1. Avoidance of Interest (Riba):

    Shariah-compliant mutual funds cannot invest in companies or instruments that involve interest, as earning or paying interest is considered unlawful in Islam.

  2. Prohibition of Gambling (Maisir) and Speculation (Gharar):

    Investments in activities that involve excessive uncertainty or gambling-like speculation are not allowed. Mutual funds must focus on ethical and transparent investments.

  3. Ethical Screening:

    Shariah-compliant mutual funds must exclude businesses involved in activities considered haram (forbidden) in Islam, such as alcohol, gambling, pork, or weapons manufacturing.

  4. Debt Levels:

    Shariah law limits the amount of debt a company can have. Mutual funds should avoid investing in businesses with excessive debt.

  5. Profit and Loss Sharing (Mudarabah):

    Investments should follow a profit-sharing model where investors and the fund manager share profits and losses in accordance with a pre-agreed ratio.

  6. Asset-Backed Investments:

    Shariah-compliant mutual funds should focus on investments backed by tangible assets or services, ensuring that there is an underlying value.

  7. Avoidance of Uncertainty (Gharar):

    Investments should be transparent and not involve excessive uncertainty or ambiguity in contracts.

  8. No Investment in Haram Income:

    Mutual funds must avoid income derived from haram sources, even if the primary business of a company is halal.

*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply

Best Shariah – Compliant Mutual Funds

Some of the most popular and well-regarded Shariah-compliant mutual funds in India are listed in the table below:

Name of Halal Mutual Funds Fund Size Risk Category 3-Year Returns 5-Year Returns 10-Year Returns Investment Objective
Tata Ethical Fund Rs. 1,879 Crores High Risk 22.62% 18.56% 15.98% To achieve long-term capital growth, this fund invests in carefully selected, Sharia-compliant stocks and related assets from promising value and growth-focused companies.
Taurus Ethical Fund Rs. 108 Crores High Risk 17.42% 15.06% 14.73% To grow your capital and provide income through investments in a diverse range of Shariah-compliant stocks.
Nippon India ETF Shariah BeEs Rs. 18 Crores High Risk 11.87% 14.31% 11.97% To match the returns of the S&P CNX Nifty Shariah Index by investing in the same stocks in the same proportions as the index itself, before expenses.

*Returns as of 10 October 2023

Who Can Invest in Shariah-Compliant Mutual Funds?

Eligibility Criteria: Anyone can invest in Shariah-compliant mutual funds, regardless of their religion. 

Some people choose to invest in Shariah-compliant mutual funds for ethical reasons, while others may invest because they believe that Shariah-compliant companies are better managed and more profitable. There is no right or wrong reason to invest in Shariah-compliant mutual funds, and they can be a good option for investors of all faiths.

What are the Benefits of Investing in Shariah-Compliant Mutual Funds?

Investing in Shariah-compliant mutual funds offers several benefits, some of which are listed below:

  • Alignment with Islamic Principles: These funds adhere to Shariah laws, ensuring ethical and morally sound investments in line with Islamic values.

  • Diversification: They provide a diversified portfolio, reducing risk by spreading investments across various assets and industries.

  • Professional Management: Expert fund managers make investment decisions, maximizing potential returns.

  • Transparency: Investments are transparent, with clear adherence to Shariah guidelines and regular reporting to investors.

  • Long-Term Growth: Designed for long-term wealth accumulation, they aim for both capital appreciation and income distribution.

  • Risk Mitigation: Screening for Shariah compliance may exclude high-risk businesses, potentially lowering investment risk.

  • Access to Global Markets: Some funds invest globally, providing exposure to international opportunities.

  • Tax Benefits: Depending on your location, there may be tax advantages associated with Shariah-compliant investments.

  • Social Responsibility: Investing in ethical businesses promotes social responsibility and ethical finance.

  • Peace of Mind: Investors gain peace of mind knowing their investments align with their religious and ethical beliefs.

FAQ's

  • Which mutual fund is Shariah-compliant?

    There are currently three Shariah-compliant mutual funds available in India:
    • Tata Ethical Fund

    • Taurus Ethical Fund

    • Nippon India ETF Nifty 50 Shariah BeES

  • Is Tata mutual fund Shariah compliant?

    Yes, Tata has one Shariah-compliant mutual fund, which is the Tata Ethical Fund. This fund invests in a diversified portfolio of Shariah-compliant equity and equity-related instruments of well-researched value and growth-oriented companies.
  • Can Muslims invest in mutual funds?

    Yes, Muslims can invest in mutual funds. There are a variety of mutual funds available, including some that are Shariah-compliant or Halal mutual funds that invest in accordance with the principles of Islamic law or Shariah. This means that the funds avoid investing in certain industries or companies, such as those that produce or sell alcohol, tobacco, pork, and gambling products, as well as those that are involved in financial services such as conventional banking and insurance.
  • Which mutual funds are allowed in Islam?

    Mutual funds allowed in Islam are those that follow Shariah-compliant principles. Key characteristics of permissible mutual funds for Muslims include:
    • No interest-bearing investments (like bonds and bank accounts)

    • No investments in companies that engage in haram/ forbidden activities (such as alcohol, tobacco, pork, and gambling products)

    • No investments in companies that harm society (e.g. companies that produce weapons or pollute the environment)

  • Is interest haram?

    Yes, interest is haram in Islam. The reason is that in the Quran, interest is seen as exploitative. When someone borrows money at interest, they are essentially paying the lender for the use of their money. This can be seen as unfair, especially if the borrower is in need of the money and the lender is in a position of power.

    Another reason why interest is haram in Islam is that it is seen as a form of gambling. When someone lends money at interest, they are essentially betting that the borrower will be able to repay the loan with interest. If the borrower is unable to repay the loan, the lender loses money. This is similar to gambling, which is also prohibited in Islam.

  • Is investing in stocks haram?

    Investing in stocks is not haram in Islam, as long as the companies that the stocks are in are Shariah-compliant. This means that the companies must not engage in any haram activities, such as producing or selling alcohol, tobacco, pork, and gambling products. Additionally, the companies must not have a high level of debt.
  • Is Tata Ethical Fund halal?

    Yes, Tata Ethical Fund is halal. It is a Shariah-compliant mutual fund that invests in companies that comply with Islamic law. Tata Ethical Fund does not invest in companies that engage in haram activities, such as producing or selling alcohol, tobacco, pork, and gambling products. The fund also does not invest in companies that have a high level of debt.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
~Source - Google Review Rating available on:- http://bit.ly/3J20bXZ
^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

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