There are many mutual fund categories that abide by socially responsible investing. Shariah Compliant Mutual Funds are a type of socially responsible investing based on the Shariah or Shariat law of Muslim religion. These mutual funds adhere to the Shariah law which is a moral code of Islam.
According to the Islamic law, a Muslim is not allowed to invest in all categories of funds.There are certain restrictions on their investment type. Shariah Compliant Mutual Funds are those which invest within the boundaries of the Islamic laws. The key features of these funds are:
Apart from the special features, there are certain rules that are required to be followed by a fund to be called as Shariah Compliant Mutual Fund.
Total Debt to Asset Ratio
This fund cannot make investments in companies whose total debt is one fourth of its total assets or more.
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.
This fund cannot acquire shares of a company who is involved in financial services like banks and insurance companies and also companies who manufacture liquor, pork, tobacco or are involved in gambling and nightclub activities, pornography, etc.
The S&P were the first to launch Shariah indices in India in 2010. The two indices that were launched for Shariah Compliant Mutual Funds were:
At present, there are three Shariah Compliant Mutual Funds in India. These are as follows:
Tata Ethical Fund is ideal for investors looking to invest in a diversified equity fund without banking and finance exposure. It is suitable for those investors who are seeking long term capital appreciation and wish to invest in equity and equity related instruments of companies which are Shariah compliant.
Taurus Ethical Fund is also for investors who want to invest in equity and equity related instruments in accordance with Shariah law. It is suitable for investors who are seeking long term capital appreciation and wish to invest as per the Islamic investment principles.
Nippon India ETF aims to generate returns that closely mimic the Nifty50 Shariah Index by investing money in various securities of that index. Investments in the securities of Nifty50 Shariah Index will be made in similar proportion as in the index. It is suitable for investors who tend to invest for medium to long term period to generate long term capital appreciation.
Note: You will need a Demat account to invest in Nippon India ETF Sharia BeES as it is an ETF.
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.
Disclaimer: The views expressed in this post are that of the author and not those of Groww.