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The word “Halal” in Arabic
means Permissible, Allowed or Legal in Religious terms.
The opposite of which would be “Haram” meaning Forbidden
or Illegal. The Islamic Law which is called The
Shariah governs the Socio-Economics in a Muslim Society
safeguarding them from Corruption & Social Evils. So all
Products, Businesses and Trading Practices involving Riba
(Interest), Alcohol, Tobacco, Gambling, Pornography, etc which
are considered Social Evils are also Haram
(Forbidden / Illegal) In the Islamic Law, and hence prohibited.
So any Business that Avoids such Haram Products &
Practices, is called a Halal or Shariah Compliant Business and
any investment done in such businesses are called Halal
Investments.
To make it easier for the investors who intend to invest in such
Halal, Ethical & Socially Responsible Companies, separate
Indices are formed in Stock Exchanges all over the globe called the Shariah
Indices,
What Is A Shariah
Index?
Shariah Index is a list of companies in a particular Stock
Exchange which are screened according to filters and criteria's and deemed Shariah-Compliant or Halal to Trade. This
list is continuously checked & re-checked quarterly and companies are
added or removed if they comply or fail to comply to the Shariah norms.
Scholars in Islamic
Jurisprudence have come up with some important Ratios
to differentiate between Shariah Compliant or Non-Compliant
companies. Following are three main Criteria:
First Criteria: In order to filter out Halal Businesses
the first major criteria to check is the Product in which
the Business is involved. If the product itself is Haram such as
Interest dealings, Manufacture and/or Sale of Alcohol or Tobacco
etc, or involved in Gambling, Pornography, etc then of course such
Businesses are outright removed from the Halal list of
Businesses.
Second Criteria: The next filter is the Debt Ratio.
Businesses have to take a certain amount of loans for their
functioning and many times it becomes a necessity and a
compulsion. But the loans available in today’s age are only
Interest Based Loans. Hence the Jurists have placed a limit to
such Interest based loans which come under compulsion to 33% of
the company’s Market Capitalisation. Some Jurists have a
conservative view of 25% and some even 10% above which they
consider the company Non-Compliant for trade. Whenever the Ratio
changes so does the Compliance Status.
Third Criteria: The third filter is the Profit Ratio /
Income Ratio. In today’s age working with banks is so common
that it is impossible to run a business without involving a bank
for payments and receipts. Since all banks are Interest based,
along with it comes Interest Income. Also, some manufacturers
have some by-products that are not the main business but comes
as a result of production. For example the by-product of Sugar
industry is Ethyl Alcohol or Ethanol. Similarly, some businesses
have a small part in Non-Halal Products which are not the main
business but cannot be operated without them such as Hotel
Industry & Airline industry etc. which has the main business in
Halal Products but have a small percentage of profits coming
from serving Non-Halal Products. Jurists have limited such
profits to 5% of the net profit which if exceeds, the company
becomes Non-Compliant to trade in. Again some Jurists have
conservative view of 3% or even 0% of the net Profit.
With the help of these and some other criteria's and filters, it
is determined which company is Shariah Compliant and which is
not and on the basis of this an Index is formed. This Index is
called Shariah Index. By the formation of such Indices or
list of companies that are halal to trade in, it becomes easier
for other businesses to adhere to Halal trading and investments,
such as Mutual Fund Schemes that invest in these Shariah
Compliant Companies with the help of the Indices to bring to the
layman an option to invest in
Shariah Compliant Mutual Funds or
Halal Mutual Funds to become a part of Halal Investments.
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 as well as debt.
When the Equity is performing well they convert their
investments in Equity and when Markets are in a bear phase they
transfer their investments into Debt instruments.
What Are Halal Or
Shariah Compliant Mutual Funds
Out of the above mentioned three types of Mutual Funds, The Debt
and Hybrid Mutual Funds are outright Non-Compliant as they deal
in Interest Based Instruments and hence any profits generating
from them will not be Halal. The Equity Mutual Funds however,
will be Halal Investment that too only if the Mutual Funds Scheme
specifically invests only in the companies listed in the
Shariah Index.
Hence, A
Shariah-Compliant Mutual
Fund or
Halal 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.
Are There Halal
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. The Scheme was launched in
1997.
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. This scheme was
launched in 2009.
Apart from these, Reliance also
had an Exchange Traded Fund (ETF) which is now taken over by
Nippon 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. |
