All You Need to Know About Shariah Compliant Mutual Funds

Features of Shariah Compliant Mutual Funds 

As per Islamic law, Muslims cannot invest in all the categories of funds as there are certain restrictions on their type of investment. Shariah Complaint Mutual Fund allows them to invest by being within the boundaries of the Islamic laws.  The following are the key features of these funds. 

• The Islamic people cannot invest in anything that could harm either emotionally or physically other people. Moreover, they cannot invest in anything that could harm the environment or in companies that promote weapons. 
• Shariah Compliant MF forbids investment in the business that profits depend on the selling of tobacco, alcohol, weapons, pork, pornography, gambling, and other military equipment. 
• Muslims are expected to avoid Riba or interests, as it is written in Kuran that anyone who engages in this has engaged himself in a war against God. Thus,  a Muslim investor is not allowed to invest in companies that deal in Riba. Therefore, the Shariah-Compliant MF  forbids all types of interests. The interest earned on these investments is distributed to the charity. 
• The Shariah Compliant MF avoid investment in fixed income instruments. 
• These funds include a very low level of risks as companies and derivatives with high debts are not included. 
• The Shariah Compliant Mutual Funds are not restricted to the Muslim investors, but investors of other religion are also allowed to invest in the fund 

Restrictions According to Shariah Law 

There are certain rules that the investors need to follow to invest in Shariah Compliant Mutual Funds. These are as following:

1. Interest-Free Companies

   Finding a company that has 100% interest-free income can be impossible. So, the Sharaih Compliant Mutual Funds invest in companies that interest income is 3% of the total income. 

2. Total Debt to Asset Ratio

   This fund cannot invest in companies whose total debt is one-fourth of its total asset or more. 

3. Restricted Business 

   This fund cannot acquire shares of the company that is involved in financial services like insurance companies and banks. Also, the Shariah fund cannot invest in companies that manufacture tobacco, liquor, pork, or are involved in nightclub activities, gambling, pornography, etc. 

Example of Shariah Compliant Mutual Fund 

Currently, there are three Shariah Compliant Mutual Funds in India. These are as following:

1. Tata Ethical Fund 

   This fund is best suitable for investors who want to invest in a diversified equity fund without getting exposure to finance and banking.  It is suitable for investors who wants to gain long-term capital appreciation and wish to invest in equity and equity securities of Shariah-compliant companies. 

2. Taurus Ethical Fund 

   This fund is best suitable for investors who want to invest in a diversified equity fund without getting exposure to finance and banking.  It is suitable for investors who wants to gain long-term capital appreciation and wish to invest in equity and equity securities of Shariah-compliant companies. 

3. Nippon India ETF Shariah BeEs

   Nippon India ETF invests money in different securities of that index that  aims to generate returns that closely resembles the Nifty50 Shariah Index. Investments in the Nifty50 Shariah Index securities are made in a similar proportion as in the index. It is best suitable for investors who wants to invest for medium to long term period to generate long term capital appreciation.

   Note: You will need a Demat account to invest in Nippon India ETF Sharia BeES as it is an ETF.

Fund Returns 

Let’s take a look at the yearly returns of different funds. 

The Bottom Point!

Shariah Compliant Mutual Funds  are a type of socialy responsible investing, which allows the muslim investors to invest in market with an objective to gain high returns on investment, without breaking any Shariah Law of Muslim religion.