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This Is Why There Is A Rising Interest In
Shariah Funds
By
Ankush Datar
31st May 2023
Shariah-compliant funds have been present in asset
management through mutual funds (MF) and portfolio management
services (PMS) in India. These funds primarily cater to investors
who abide by Shariah laws, which lay out the guidelines on sectors
and companies that are Shariah-compliant. The Islamic community had
refrained from investing in the equity markets primarily because the
income earned would not be halal (permissible). An investment may
not be considered Shariah-compliant if it fails to meet the
requirements of Shariah laws.
However, with increasing awareness among experts from the community
and fund houses, this trend has been changing, and more and more
investors have gradually started participating in the market. One
can invest in these funds through the PMS or MF route. The rules and
norms for Shariah-compliant investing in the stock market are
divided into the following three sections:
(i) Business and industry screening parameters for Shariah-compliant
companies; (ii) Financial screening parameters for Shariah-compliant
companies; and (iii) Purging of impure (interest) income for
investment in Shariah-compliant companies.
Companies involved in the business of
alcohol, tobacco, gambling, gold and silver trading, banking and
financials, pork and non-vegetarian, advertising, media and
entertainment are excluded. These industries may not fall within the
parameters of ethical investing for some communities and would not
be suitable investments for observant community investors. Some
basic financial screening parameters that are carried out to filter
stocks in addition to the sectors mentioned above are: a) Total debt
to total assets of the company should be less than or equal to 25%;
b) Total interest income to total assets of the company should be
less than or equal to 3%; c) Receivables and cash balances to total
assets of the company should be less than 90%.
Therefore, there will be instances where companies are operating in
Shariah-compliant industries but do not meet the requirements,
according to the financial screening parameters.
A very small section of the Jain community also maintains strict
parameters when it comes to investing in sinful industries, and this
fund selectively caters to their needs as well.
Fund houses seek the services of advisory from Shariah Scholars for
a list of Shariah-compliant stocks to invest in, and then handpick
stocks from the list.This service of availing Shariah advisory by
asset managers is availed through reputed organizations. Whenever a
stock fails to comply with Shariah standards , fund houses sell the
stock from clients’ accounts.
The example below illustrates a simple screening process by fund
houses, to curate portfolios as per their fund management styles: a)
Out of the listed stocks on Indian exchanges, Shariah-compliant
stocks are picked as per various parameters; and b) Based on this,
they follow their own portfolio management style to pick stocks.
Shariah Funds are benchmarked against the NiftyShariah 500 Index,
which is heavily inclined towards companies from information
technology, fast-moving consumer goods, consumer durables,
healthcare, and automobile industries. Therefore, the index
composition would look different from that of NSE 500.
Similarly, certain asset managers offer exchange traded funds based
on the Nifty50 Shariah Index, for retail investors. As of 26 May,
the NiftyShariah 500 outperformed the Nifty50 and Nifty 500 over a
10-year period, considering point-to-point returns.
Further awareness about these funds, and a shift in mindset could
make this an attractive market for those investors who have been
staying away from the equity markets.
Ankush Datar is associate vice president- PMS at Phillip Capital
India.
SOURCE: MINT
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