shariah compliant mutual funds guide

What are Shariah compliant mutual funds?

by Elearnmarkets on Investing Basics, Personal Wealth
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Recently, I and my friends were having a discussion about our investment plans. One of my Muslim friend said that he had plans to invest in something called “Shariah Compliant Mutual Funds”. When I asked him what it was, he told some interesting facts about it.Let’s discuss them one by one.

What are Shariah compliant mutual funds?

Shariah compliant mutual funds are just like any other mutual fund investments but the only difference is that they are based on the Shariah or Shariat law. These funds are guided by the principles of the Islamic law.

Basically, these funds restrict their investments to companies that are ethical and comply with the Shariah law. If you have heard about socially responsible investing, then Shariah compliant funds are one of them. According to the Islamic law, a Muslim is not allowed to invest in anything that will increase immorality or that will increase alcohol or drugs or even investing in companies that promote weapons of mass destruction.

Muslims are not allowed to invest in anything that could harm other people (physically or emotionally) or that could harm the environment in a very negative way.

Another important thing that Muslims are expected to avoid is the interest or Riba. As per the Kuran, it is considered that anyone who engages in this, it is as if he has engaged in war against God himself. That is why Muslims are also not allowed to invest in companies that deal blatantly in Riba.

Examples of Shariah based Mutual Funds

The S&P was the first to launch Shariah indices in India in 2010. The two Shariah-Compliant funds that were launched were-

  1. S&P CNX 500 Shariah
  2. S&P CNX Nifty Shariah

With the passage of time, more such funds have been launched. Currently, among the Shariah compliant funds list in India, there are only three funds-

  • Tata Ethical Fund
  • Taurus Ethical Fund
  • Reliance ETF Shariah BeES

Restrictions as per Shariah law

There are certain rules that need to be followed so that a fund can be called a Shariah-Compliant fund.

  • Total Debt to Asset ratio
    Investments cannot be made in a company whose total debt is one fourth of its total assets.
  • Interest free companies
    Since it is almost impossible to find a company that is 100% interest free, so it has been formulated that companies whose interest income is up to 3% of its total income should be forgiven.
  • Restricted businesses
    Apart from these, a Shariah Compliant fund cannot acquire shares of a company who is involved in financial services on interest like banks and insurance companies and also companies who manufacture liquor, pork, tobacco or are involved in gambling and nightclub activities, pornography etc.

FAQ’s related to Shariah Mutual Funds

Who are the people who can invest in Shariah Mutual Funds?

Although Shariah compliant mutual funds are based on Islamic law, it is not restricted to just Muslims. Anyone who wishes to invest only in ethical companies can invest in such funds.

Will I enjoy any tax benefits also under this investment?

There are no tax benefits under the scheme. It is taxable like any other mutual fund scheme.

If a person is from any other religion, can he/she also invest in this fund?

Yes, anyone can invest in this fund even if he/she is from other religion.

Is there any minimum amount to be invested in these funds?

Yes, the minimum amount to be invested in these funds is Rs.500. However, this amount can differ from company to company.

Know more about investing in mutual funds

Call by Reserve Bank of India (RBI)

In response to a RTI application filed by a PTI correspondent with respect to launch of Shariah compliant mutual funds, RBI said that no steps have been taken to introduce Shariah-compliant mutual funds.

The Government of India had sought its reply for the introduction of Shariah-compliant mutual funds in India. “The Reserve Bank of India has not taken any step for introduction of Shariah-compliant mutual funds in India,” the reply said.

This application was with respect to a Shariah-compliant mutual fund launched by the SBI in 2014 which was later deferred to make it a better and fully fledged Islamic law based mutual fund in the future.

“When the launch of Sharia mutual fund was announced by SBI, some of the gulf countries were very enthusiastic for investment. It is high time the RBI and the finance ministry instructed SBI to relaunch the same,” said H Abdur Raqeeb, General Secretary, Indian Centre for Islamic Finance, an NGO trying to introduce members of the Muslim community to the Shariah compliant banking system.

To this SBI had rejected the RTI application seeking details on the relaunch of the mutual fund scheme saying that the “query is vague and not specific”.

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