Everything You Need to Know About Shariah-Compliant Mutual Funds

Everything You Need to Know About Shariah-Compliant Mutual Funds

Many mutual fund types adhere to socially responsible investing. Shariah Compliant Mutual Funds are a form of socially responsible investing that is based on Shariah law or Shariat law. These mutual funds adhere to Shariah law which is an Islamic code of morality.

Features of Shariah - Compliant Mutual Funds

A Muslim cannot invest in all types of funds, according to Islamic law. Their investment type is subject to restrictions. Shariah Compliant Mutual Funds invest within the Islamic laws. These funds have the following key features:

  • Muslims are prohibited from investing in any business that could cause harm to others (emotionally or physically) or the environment.
  • Muslims should avoid Riba or interests. According to Kuran, anyone engaging in such activities is considered to be waging war against God. Muslims are not permitted to invest in Riba-related companies.
    These funds ban all types of interest. A Shariah board is appointed to avoid these prohibited sources of income and distribute it to charity.
  • These funds are known to avoid high levels of risk. Companies with high levels of debt and derivatives are excluded.
  • These funds are not suitable for investment in fixed-income instruments.
  • These funds are not restricted to Muslims only. All investors are permitted to invest in them.

Shariah Law's Restrictions

A fund can be called Shariah Compliant Mutual Fond if it follows certain rules.

The ratio of Total Debt to Asset

The fund can't invest in companies whose total assets exceed one-fourth of their total debt.

The Interest-Free Companies

It is difficult to find companies that have 100% interest-free income so the fund is designed to invest in companies that earn up to 3% of their total income.

Restricted business

The fund cannot purchase shares of companies involved in financial services such as banks and insurance companies, or companies that manufacture liquor, tobacco, or are involved with gambling and nightclub activities.

Few Examples of Shariah Compliant Mutual Fund

In 2010, the S&P was the first Indian company to launch Shariah indexes. Two indices were launched to support Shariah compliant mutual funds:

  • S&P CNX 500 Shariah
  • S&P CNX Nifty Shariah

Currently, there are only three Shariah-compliant mutual funds in India. These three mutual funds are Shariah compliant and can be found here:

Tata Ethical Fund

Tata Ethical Fund is a great option for investors who want to invest in a broad equity fund that doesn't have any banking or finance exposure. This fund is ideal for investors looking to increase their long-term capital appreciation. It also allows them to invest in equity or equity-related instruments of Shariah-compliant companies.

Taurus Ethical Fund

Investors who want to invest in equity and equity-related instruments according to Shariah law can use Taurus Ethical Fund. This fund is ideal if you are looking for long-term capital appreciation and want to invest in accordance Islamic investment principles.

Nippon India Shariah ETF Shariah BeEs formerly Reliance ETF Shariah BeEs

Nippon India ETF seeks to produce returns that closely match the Nifty50 Shariah index by investing money into various securities. Nifty50 Shariah index securities will be invested in a similar way as the index. This index is ideal for investors who are looking to increase their capital over a long period of time.

You will need to have a Demat account in order to invest in Nippon India ETFS Sharia BeES, as it's an ETF.

To Summerize

Shariah Compliant Mutual Funds can be used by investors looking for a socially responsible way to invest. The Shariah law places restrictions on investments and funds must adhere to them. Therefore, they have a limited investment focus. The performance of Shariah-compliant companies in a particular sector will also affect the return. After weighing all the pros and cons, an investor should look into Shariah Compliant mutual funds.

Best Wishes for Investing and Good Luck For The Future!

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