Understanding Shariah Compliant Mutual Funds
Introduction to Shariah Compliant Mutual Funds
Shariah Compliant Mutual Funds: An Overview
Shariah Compliant Mutual Funds are a subset of socially responsible investing guided by Islamic principles, particularly Shariah or Shariat law. These funds strictly adhere to the moral code of Islam and impose specific criteria on their investments.
Features of Shariah Compliant Mutual Funds
Ethical Investment Principles
Muslims are prohibited from investing in activities that could harm individuals, the environment, or promote weapons. These funds exclude businesses involved in alcohol, tobacco, pork, weapons, gambling, and pornography.
Islamic law forbids interest (Riba). Therefore, Shariah Compliant Mutual Funds avoid companies engaged in interest-based transactions and redistribute forbidden income to charity.
These funds prioritize risk avoidance by excluding companies with excessive debt levels and avoiding investment in fixed-income instruments.
Shariah Compliant Mutual Funds are not exclusive to Muslims; investors of all religions are welcome.
Shariah Law Requirements
Funds cannot invest in companies with total debt exceeding one-fourth of their total assets.
Interest Income Threshold
Investment is allowed in companies with interest income up to 3% of total income, recognizing the difficulty of finding completely interest-free firms.
Investment is prohibited in financial services, liquor, pork, tobacco, gambling, nightclub activities, and pornography-related companies.
Examples of Shariah Compliant Mutual Funds
1. Tata Ethical Fund
Tata Ethical Fund is an equity fund that excludes banking and finance sectors, catering to investors seeking long-term capital appreciation.
2. Taurus Ethical Fund
Similar to Tata Ethical Fund, Taurus Ethical Fund is designed for long-term capital appreciation, aligning with Shariah principles.
3. Nippon India ETF Shariah BeEs
Nippon India ETF aims to replicate the Nifty50 Shariah Index’s returns by investing in its constituent securities. It’s suitable for medium to long-term investors.
Note: A Demat account is required to invest in Nippon India ETF Sharia BeES, as it is an Exchange-Traded Fund (ETF).
Shariah Compliant Mutual Funds offer a socially responsible investment avenue, but their narrow focus and adherence to Shariah law can impact returns. Prospective investors should carefully weigh the advantages and disadvantages before considering these funds.