Shariah Compliant Mutual Funds

What are Shariah Compliant Mutual Funds?

Shariah-Compliant Mutual Funds are investment funds built to strictly comply with Islamic law (Shariah). Their defining characteristic is the absolute prohibition of interest, which means they cannot invest in conventional bonds or interest-bearing fixed deposits. 

They are mandated to avoid investments in sectors deemed unethical or socially harmful, such as alcohol, gambling, pornography, pork, and conventional financial institutions. All holdings must pass a two-step screening process: a qualitative check on the company's core business activity and a quantitative check to ensure the company maintains low debt and minimal income.

Shariah Compliant Mutual Fund Returns

In India, at present, there are only three Shariah-compliant mutual funds at present. Let’s take a look at the yearly returns of different funds:

*Shariah Compliant Mutual Fund returns as of November 2025

1. Nippon India ETF Nifty 50 Shariah BeES

   This is a passive Exchange Traded Fund (ETF) that aims to track the performance of the Nifty 50 Shariah Index. You buy and sell units of this Shariah-compliant fund on the stock exchange just like a regular stock.

   Parameters	Details
   Fund Name	Nippon India ETF Nifty 50 Shariah BeES
   NAV	₹ 510.20 (as on 16th December, 2025)
   AUM	₹45.88 Crs
   Expense Ratio	0.96%
   Return 5 Years	9.53%
   Minimum Investment	SIP ₹1000 & Lumpsum ₹10,000
   Risk Level	Principal at very high risk
   Launch Date	18th March, 2009
   Asset Allocation	Equity: 99.83%, Others: 0.17%
   Top Sectors	Consumer Discretionary Consumer Staples Energy & Utilities Healthcare Materials Technology
   Top Holdings	Infosys Ltd Tata Consultancy Services Ltd Hindustan Unilever Ltd Sun Pharmaceutical Industries Ltd HCL Technologies Ltd Ultratech Cement Ltd Tata Motors Ltd Asian Paints Ltd Hindalco Industries Ltd Trent Ltd
   Fund Managers	NA
   Fund Type	Open-ended

2. Taurus Ethical Fund Direct Growth

   This is an actively managed Equity Thematic Fund that invests in a diversified portfolio of stocks screened for Shariah compliance, aiming for long-term capital appreciation. The "Direct Growth" option means a lower expense ratio, and profits are reinvested.

   Parameters	Details
   Fund Name	Taurus Ethical Fund Direct-Growth
   NAV	₹ 145.64 (as on 16th December, 2025)
   AUM	₹320.48 Crs
   Expense Ratio	0.97%
   Return 5 Years	17.3%
   Minimum Investment	SIP ₹1000 & Lumpsum ₹500
   Risk Level	Principal at very high risk
   Launch Date	NA
   Asset Allocation	Equity: 98.57%, Others: 1.43%
   Top Sectors	Consumer Discretionary Industrials Consumer Staples Energy & Utilities Financial Healthcare Materials Real Estate Technology
   Top Holdings	Reliance Industries Ltd Tata Consultancy Services Ltd Infosys Ltd Net Receivables Coal India Ltd Bharat Petroleum Corporation Ltd Narayana Hrudayalaya Ltd Polycab India Ltd Colgate-Palmolive (India) Ltd Hindustan Unilever Ltd
   Fund Managers	NA
   Fund Type	Open-ended

3. Tata Ethical Fund

   This is an actively managed, open-ended equity fund that seeks to provide medium to long-term capital gains. It is one of the oldest ethical funds in India.

   Parameters	Details
   Fund Name	Tata Ethical Fund Regular-Growth
   NAV	₹ 386.46 (as on 16th December, 2025)
   AUM	₹3,571.70 Crs
   Expense Ratio	1.89%
   Return 5 Years	16.53%
   Minimum Investment	SIP ₹1000 & Lumpsum ₹5,000
   Risk Level	Principal at very high risk
   Launch Date	24th May, 1996
   Asset Allocation	Equity: 93.74%, Others: 6.26%
   Top Sectors	Consumer Discretionary Industrials Consumer Staples Diversified Energy & Utilities Healthcare Materials Technology
   Top Holdings	Cash/Net Current Assets Infosys Ltd Tata Consultancy Services Ltd Hindustan Unilever Ltd Tech Mahindra Ltd Bharat Petroleum Corporation Ltd HCL Technologies Ltd Cummins India Ltd SRF Ltd Hero Motocorp Ltd
   Fund Managers	NA
   Fund Type	Open-ended

Key Principles of Shariah-Compliant Investing

Shariah-compliant investing is based on ethical and moral guidelines derived from Islamic law, focusing on fair and responsible financial practices.

1. Prohibition of Interest:

   Earning or paying interest on money is strictly forbidden.

   • Investments must be structured around profit-and-loss sharing.
   • Returns must be generated from tangible, productive, asset-backed activities, not simply from lending money over time.

2. Avoidance of Excessive Uncertainty:

   Transactions must be clear, transparent, and straightforward, avoiding elements that could lead to dispute or loss for one party.

   • Investments that involve excessive speculation are prohibited.
   • Rules out highly complex derivatives, futures contracts, or the sale of assets whose existence or ownership is uncertain.

3. Asset-Backed Investments and Risk Sharing:

   Financial transactions must be tied to tangible, identifiable assets or real economic activity, not speculative or debt-based instruments.

   • All parties in an investment must share the risk and reward equitably.
   • This ensures capital contributes directly to the real economy rather than just generating income from debt.

4. Socially Responsible and Ethical Investing:

   The principles naturally align with Socially Responsible Investing, emphasizing the ethical impact of capital. Investments must deliver:

   • A positive social impact
   • financial return, and
   • contribute to the well-being of the community

5. Avoidance of Forbidden Activities:

   Investment is prohibited in companies primarily involved in activities considered unethical or harmful under Islamic law. These prohibited sectors include:

   • Alcohol, Gambling, and Weapons
   • Pork/Non-Halal food production
   • Conventional financial services
   • Adult entertainment/Pornography

Features of Shariah Compliant Mutual Funds 

Shariah-compliant mutual funds are designed to strictly adhere to the ethical and financial principles of Islamic Law (Shariah). A few of the features of Shariah Compliant Mutual Funds are: 

1. Exclusion of Prohibited Industries (Haram):

   No investment in companies whose primary business involves alcohol, gambling, tobacco, pork, weapons, or conventional interest-based financial services (banks, insurance).

2. Prohibition of Interest (Riba):

   Avoids interest-bearing instruments (conventional bonds) and screens out companies with excessive interest-based debt (less than 33% of total assets) or non-compliant income.

3. Shariah Board Oversight:

   An independent panel of Islamic scholars reviews and certifies the fund's investment policy and portfolio to ensure continuous compliance with Islamic law.

4. Financial Screening Ratios:

   Companies must pass strict financial checks, usually ensuring that non-compliant income is minimal (less than 5% of total revenue).

5. Purification of Income:

   Any minor, unavoidable non-compliant income earned by the fund is purged before profits are distributed to investors.

6. Focus on Ethical Equities:

   Predominantly invests in stocks of financially sound companies that adhere to ethical and socially responsible business practices.

Key Restrictions for Shariah-Compliant Mutual Funds

Shariah-Compliant Mutual Funds are meticulously designed to adhere to Islamic law, mandating both ethical business conduct and financial health based on specific thresholds.

1. Prohibited Business Activities

   Funds are strictly forbidden from investing in companies whose primary income (typically defined as more than 5% of total revenue) is derived from sectors considered Haram. Forbidden sectors include:

   • Conventional banking, interest-based insurance, and lending.
   • Alcohol, Gambling, Pork, Tobacco, and Adult Entertainment.
   • Certain defense-related manufacturing.

2. Financial Ratio Restrictions

   Companies must pass stringent financial tests to limit the fund's exposure to interest and excessive uncertainty (Gharar). The most common global standards apply the following maximum thresholds:

   • Total interest-bearing debt must be less than 33.33% of the company's total assets or market capitalization.
   • Income earned from non-compliant sources must be less than 5% of the company's total revenue.

3. Income Purification (Tathir)

   If a company is approved but still generates a minor amount of non-compliant income, the fund must manage this:

   • The non-compliant portion of any dividend received by the fund is calculated.
   • This amount must be purified by being donated to charity and cannot be included as profit for the investor.

Tax Treatment of Shariah Compliant Mutual Funds

In India, Shariah-compliant mutual funds are taxed exactly like any other conventional mutual fund. The Funds are taxed like regular Equity Mutual Funds since they primarily invest in stocks.

Both LTCG and STCG apply to your gains as follows:

1. Short-Term Capital Gains (STCG):

   This is profit from selling units held for 12 months or less. The tax rate is a flat 20% on the entire gain.

2. Long-Term Capital Gains (LTCG):

   This is profit from selling units held for more than 12 months. The tax rate is 12.5%, but only on the portion of the gain that exceeds ₹1,25,000 in a financial year (i.e., the first ₹1,25,000 of LTCG is tax-exempt)

Conclusion

Shariah-compliant mutual funds are primarily defined by two principles: the prohibition of interest and the avoidance of forbidden sectors. Key features include rigorous financial screening to ensure low debt and oversight by a Shariah Supervisory Board. Funds such as Nippon India ETF Nifty 50 Shariah BeES, Taurus Ethical Fund, and Tata Ethical Fund follow these rules but are subject to the standard tax treatment of conventional equity funds in India.