Shariah Compliant & Halal Mutual Funds in Indian
Halal Stock provides you Comprehensive analysis of the Indian Equity Market (NSE & BSE) at a glance from the Shariah compliant perspective.
What does the term Shariah Compliant Mutual Funds stands for?
Before we understand the concept of Shariah-compliant mutual funds or investments in specific, it is important to know what Shariah is and what is the Shariah Law.
Shariah Law which is also known as Islamic Law is a religious law that forms a part of the Islamic tradition. It is derived from the religious guidelines of Islam, particularly the Quran and the hadith. In Arabic, the term Shariah refers to God’s divine law.
Shariah Compliant Mutual Funds is socially responsible investing based on the Shariah or Shariat law of Islam. These mutual funds stick to the Shariah law which is an ethical code of Islam.
Restrictions in Investments as per the Shariah Law
According to the Shariah law, Muslims are not allowed to invest in all the categories of funds. There are certain limitations on their investment type. Shariah Compliant Mutual Funds are those which invest within the boundaries of the Islamic laws. The significant features of these funds are:
- Restricted business: One of the basic principles of Islamic law is a Muslims cannot invest in something that could harm other people physically or emotionally or harm the environment. So, these funds forbid investments in businesses that generates a major portion of its income by selling alcohol, tobacco, pork, weapons and other military equipment, gambling, and pornography.
- Prohibition of Interest/Riba: Muslims are expected to avoid interests. The Quran says “Anyone who engages in this has engaged himself in war against God” That’s the reason why Muslims are also not allowed to invest in companies that deals in Interest.
Taking a loan against interest is considered unlawful. It is deemed morally unjust and unfair to pay interest.
- Total Debt to Asset Ratio: You cannot make investments in companies whose total debt is one fourth of its total assets or more. These funds tend to avoid immoderate levels of risks. Derivatives and companies with high debts are not included.
- Interest Free Companies: Interest Free Companies: As it is impossible to find a company that has 100% interest free income, it is formulated that this fund can invest in companies whose interest income is up to 3% of its total income. These funds avoid investment in fixed-income instruments.
2 Shariah Compliant Mutual Funds in India as of now...
Currently, this fund has around 57% of its investment in large-cap companies and 42% in mid and small-cap companies. It has given a return of 11.61% over the previous 5-year period as of 27 January 2021.
Currently, this fund has half of its assets invested in large-cap companies and the rest of its assets in small-cap and mid-cap companies. It has given a return of 13.03% over the previous 5-year period as of 27 January 2021.
Conclusion : Shariah Compliant Mutual Funds are funds for those investors who are looking for a socially responsible form of investing. With the restrictions put on the investments by the Shariah law, the funds have to abide by the same and thus have a narrow defined investment focus. Due to this, the return is also bound by the performance of the specific sector of Shariah compliant companies. Thus, the investor should consider investing in Shariah Compliant Mutual Funds after knowing all the pros and cons of the same.
Along with the restrictions of the Shariah Law. Other than these, investing in gold is considered as Shariah-compliant. However, as most gold funds invest some portion of their money in fixed income securities, it is ethically not an option. However, one may consider investing in a Gold ETF.
