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Halaal Investments or Shariah-Compliant Investments

 

Investments done in any Company or Mutual Funds that comply to the Shariah Principles are called Halaal Investments or Shariah-Compliant Investments. The primary of which is that the basis of such investment should be on a Profit & Loss sharing principle and strictly not on Riba (usury/Interest). The most efficient investment avenue for a long-term growth are Mutual Funds

 

 

What are Mutual Funds?

 

A mutual fund is a professionally-managed trust that pools the savings of many investors and invests them in securities like stocks, bonds, short-term money market instruments and commodities such as precious metals. Investors in a mutual fund have a common financial goal and their money is invested in different asset classes in accordance with the fund’s investment objective. Investments in mutual funds entail comparatively small amounts, giving retail investors the advantage of having finance professionals control their money even if it is a few thousand rupees.

There are basically three types of Mutual Funds depending on their objectives where & how they conduct their business, they are:

 

1 - Equtiy Mutual Funds - These Mutual Funds invest their capital strictly in Equity Markets, buying and selling shares of companies and thereby earning profits through such trades.

 

2 - Debt Mutual Funds - These Mutual Funds invest their capital strictly in interest based instruments such as Treasury Bills, Government Securities, Corporate Bonds, Money Market instruments and other debt securities of different time horizons.

 

3 - Hybrid Mutual funds - These Mutual Funds also called as balanced schemes invest into a mix of equity and debt.

 

 

What are Shariah-Compliant Mutual Funds?

 

The primary criteria of any trade or investment to qualify it as Shariah-Compliant is that it should not be involved in any Haraam (Forbidden) activity or product such as Riba (Interest), Pork, Alchohol, Tobacco, Pornography, Gambling, etc. Out of the three types of Mutual Funds discussed above, Debt & Hybrid Mutual Funds do not comply to the Shariah Principles as both invest their capital wholly or partly in Interest (Riba) based instruments and hence cannot be termed as Shariah-Compliant. Equity Mutual Funds does comply to the primary criteria as its investment is used in trading equity shares of various companies on the Stock Exchange. However, every company traded on the stock exchange is not Shariah-Compliant. Islamic principles govern many aspects of a Muslim’s life, from social to economic matters. All of which are outlined in the Shariah Law derived from The Qur'aan & The Sunnah. The scholars have outlined Some major filters to identify shares that would be Halaal to trade based on the Shariah, thus calling it Shariah-Compliant Equity.

1 - Nature Of Company's Business: Companies whose Business is solely or major part of it is involved in Haraam products like Riba (Interest), Gambling, Alcohol, Pork, Tobacco, nudity, etc. which are considered Social Evils and also Forbidden in the Shariah, are excluded.

2 - Debt Ratio: Companies taking Interest-based loans of more than 33% of their Total Market Cap are also excluded.

3 - Profit Ratio: Companies who earn more than 5% of their Total Net Profits from Non-Halal Businesses or  investments are also excluded.

4 - Receivables Ratio: Companies having Account Receivables of more than 49% of their Total Market Cap are also excluded.

The remainder of Stocks after the above criteria screenings are considered Shariah-Compliant Stocks and hence included in the Shariah Index.

 

Shariah Index is a list of companies in a particular Stock Exchange which are screened according to the above mentioned criteria and deemed Shariah-Compliant or Halaal to Trade. This list is continuously re-checked quarterly and companies are either added or removed if they comply or fail to comply to the Shariah norms.

 

Hence, A Shariah-Compliant Mutual Fund is a fund that is an Equity Based Mutual Fund that only trades in Equity Shares of Shariah-Compliant companies that are listed under the Shariah-Index.



Do We Have Shariah-Compliant Mutual Funds In India?

Yes, There are two Shariah-Compliant Mutual Funds that have an objective to provide capital gains by investing in Shariah-Compliant equity and equity-related instruments, they are:

 

1 - Tata Ethical Fund - Tata Ethical Fund is an open ended equity fund which invests in a diversified equity portfolio based on principles of Shariah. The investment objective of the scheme is to provide medium to long-term capital gains by investing in Shariah compliant equity and equity-related instruments of well-researched value and growth-oriented companies

 

2 - Taurus Ethical Fund - Taurus Ethical Fund is an Open Ended Equity Oriented Scheme that will invest in companies which are in compliance with the Shariah norms. The scheme will primarily invest in Equity and Equity related instruments. The fund is Actively Managed and invests in diversified portfolios. The investments in this fund are based on the fundamentals of Shariah or Shariat, which are guided by the Islamic investment philosophy which invests in companies based on certain screening norms. Managed by seasoned Investment Professionals from Taurus Mutual Fund.

 

Apart from these, Reliance also has an Exchange Traded Fund (ETF) named Shariah BeES that can be traded on Stock Exchanges only. SBI is also planning to lunch a Shariah-Compliant Fund soon named SBI Shariah Equity Fund - The scheme seeks to provide medium to long term capital gains by investing in Shariah Compliant Equity & Equity related instruments.

 

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