All You Need to Know About Shariah Compliant Mutual Funds

Features of Shariah Compliant Mutual Funds 

According to Islamic law, Muslims have specific limitations on the types of funds they can invest in. Shariah Compliant Mutual Funds provide an avenue for them to invest while adhering to these religious guidelines. Here are the main characteristics of the funds: 

• Muslims are prohibited from investing in anything that could cause harm to others, be it emotional or physical. Additionally, they are forbidden from supporting ventures that pose harm to the environment or companies involved in the production of weapons.

• Shariah Compliant Mutual Funds prohibit investing in enterprises whose earnings are derived from selling tobacco, alcohol, weaponry, pork, explicit content, betting, and related military goods.

• Muslims are required to stay clear of Riba, or interest, as the Quran states that those who engage in it are waging a battle against God. Consequently, a Muslim investor is prohibited from investing in businesses involved in interest-based transactions. This is why Shariah-Compliant Mutual Funds strictly avoid any form of interest. Any interest earned from these investments is instead directed towards charitable purposes.

• The Shariah-compliant mutual fund refrains from investing in fixed-income instruments.

• These funds include a very low level of risk as companies and derivatives with high debts are not included. 

• The Shariah Compliant Mutual Funds are not restricted to only Muslim investors; investors of other religions 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 follows:

1. Interest-Free Companies

   Finding a company that has 100% interest-free income can be impossible. So, the Shariah Compliant Mutual Funds invest in companies whose 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 assets or more.

3. Restricted Business

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

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Example of Shariah Compliant Mutual Fund 

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

1. Tata Ethical Fund

   This fund is ideal for investors seeking a diversified equity investment but prefers to avoid exposure to the finance and banking sectors. It caters to those looking for long-term capital growth and who wish to invest in equity and equity securities of companies compliant with Shariah laws.

2. Taurus Ethical Fund

   This fund is ideal for investors seeking a diversified equity option but aiming to avoid exposure to the finance and banking sectors. It's well-suited for those looking for long-term capital growth and interested in investing in equity and equity securities of companies compliant with Shariah laws.

3. Nippon India ETF Shariah BeEs

   The Nippon India ETF allocates funds into various securities from the Nifty50 Shariah Index, intending to mirror its returns. The investments in the Nifty50 Shariah Index securities mirror the index's proportions. This ETF is well-suited for investors seeking medium to long-term growth in capital value.

Note: You will need a Demat account to invest in Nippon India ETF Sharia BeES as it is an ETF.
*All savings are provided by the insurer as per the IRDAI-approved insurance plan. Standard T&C Apply

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

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Fund Returns 

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

Bottom Line!

Shariah Compliant Mutual Funds fall under the category of socially responsible investments. They enable Muslim investors to participate in the market with the aim of achieving profitable returns on their investments, all while adhering strictly to the principles of Shariah Law within the Muslim religion.