Exploring the World of Shariah-Compliant Mutual Funds
Exploring the World of Shariah-Compliant Mutual Funds
Sep 20, 2023
8 minutes
In the realm of socially responsible investing, one category stands out for its adherence to a moral code rooted in the Muslim religion – Shariah-Compliant Mutual Funds.
Guided by the principles of the Shariah or Shariat law, these funds offer investors a unique opportunity to align their financial goals with their ethical beliefs.
Let's delve into the captivating world of Shariah-Compliant Mutual Funds and discover what sets them apart.
The Features That Define Shariah-Compliant Mutual Funds:
Shariah-Compliant Mutual Funds operate within the boundaries of Islamic laws, offering Muslim investors the opportunity to invest without compromising their values. These funds encompass several distinguishing features, including:
1. Socially Responsible Investments: Investments in businesses that harm individuals, the environment, or involve activities such as the sale of alcohol, tobacco, pork, weapons, gambling, or pornography are strictly forbidden.
2. Interest-Free Investing: In accordance with the Quran, which forbids engaging in interest-based transactions (Riba), Shariah-Compliant Mutual Funds avoid investments in companies associated with interest income. Instead, they distribute any forbidden income to charitable causes.
3. Risk Management: These funds prioritize moderate risk levels by avoiding companies with excessive debts and derivatives. Fixed-income instruments are also excluded from their investment portfolios.
4. Inclusive for All: While Shariah-Compliant Mutual Funds were designed with the principles of Islam in mind, they welcome investors of all religious backgrounds.
Understanding Shariah Law Restrictions:
To be classified as a Shariah-Compliant Mutual Fund, certain rules must be adhered to. These include:
1. Total Debt to Asset Ratio: Investments are prohibited in companies with a total debt exceeding one fourth of their total assets.
2. Interest Income Limit: Given the difficulty in finding companies with 100% interest-free income, these funds are allowed to invest in businesses where interest income constitutes up to 3% of their total income.
3. Restricted Businesses: Shariah-Compliant Mutual Funds cannot acquire shares in financial service companies, including banks and insurance providers. They also avoid investments in companies involved in liquor, pork, tobacco, gambling, nightclub activities, or pornography.
Notable Examples of Shariah-Compliant Mutual Funds:
India witnessed the launch of Shariah indices by S&P in 2010, paving the way for Shariah-Compliant Mutual Funds. Noteworthy examples include:
1. Tata Ethical Fund: This fund offers diversified equity investments without exposure to banking and finance sectors. It caters to long-term investors seeking capital appreciation while adhering to Shariah principles.
2. Taurus Ethical Fund: Investors who prioritize Shariah-compliant equity and equity-related instruments will find this fund appealing. It aligns with Islamic investment principles and aims to achieve long-term capital appreciation.
3. Nippon India ETF Shariah BeEs: Formerly known as Reliance ETF Shariah BeES, this fund seeks to mirror the performance of the Nifty50 Shariah Index. It appeals to medium to long-term investors aiming for capital appreciation. A Demat account is required for investing in this ETF.
Conclusion:
For investors seeking a socially responsible approach to investing, Shariah-Compliant Mutual Funds offer a compelling choice.
The restrictions imposed by Shariah law lead these funds to focus on a specific sector of Shariah-compliant companies, with potential returns tied to their performance.
As with any investment, it is crucial for investors to carefully consider the pros and cons before embarking on their Shariah-compliant investment journey.
By aligning financial aspirations with ethical values, investors can contribute to a more responsible and sustainable future through Shariah-Compliant Mutual Funds.
In the realm of socially responsible investing, one category stands out for its adherence to a moral code rooted in the Muslim religion – Shariah-Compliant Mutual Funds.
Guided by the principles of the Shariah or Shariat law, these funds offer investors a unique opportunity to align their financial goals with their ethical beliefs.
Let's delve into the captivating world of Shariah-Compliant Mutual Funds and discover what sets them apart.
The Features That Define Shariah-Compliant Mutual Funds:
Shariah-Compliant Mutual Funds operate within the boundaries of Islamic laws, offering Muslim investors the opportunity to invest without compromising their values. These funds encompass several distinguishing features, including:
1. Socially Responsible Investments: Investments in businesses that harm individuals, the environment, or involve activities such as the sale of alcohol, tobacco, pork, weapons, gambling, or pornography are strictly forbidden.
2. Interest-Free Investing: In accordance with the Quran, which forbids engaging in interest-based transactions (Riba), Shariah-Compliant Mutual Funds avoid investments in companies associated with interest income. Instead, they distribute any forbidden income to charitable causes.
3. Risk Management: These funds prioritize moderate risk levels by avoiding companies with excessive debts and derivatives. Fixed-income instruments are also excluded from their investment portfolios.
4. Inclusive for All: While Shariah-Compliant Mutual Funds were designed with the principles of Islam in mind, they welcome investors of all religious backgrounds.
Understanding Shariah Law Restrictions:
To be classified as a Shariah-Compliant Mutual Fund, certain rules must be adhered to. These include:
1. Total Debt to Asset Ratio: Investments are prohibited in companies with a total debt exceeding one fourth of their total assets.
2. Interest Income Limit: Given the difficulty in finding companies with 100% interest-free income, these funds are allowed to invest in businesses where interest income constitutes up to 3% of their total income.
3. Restricted Businesses: Shariah-Compliant Mutual Funds cannot acquire shares in financial service companies, including banks and insurance providers. They also avoid investments in companies involved in liquor, pork, tobacco, gambling, nightclub activities, or pornography.
Notable Examples of Shariah-Compliant Mutual Funds:
India witnessed the launch of Shariah indices by S&P in 2010, paving the way for Shariah-Compliant Mutual Funds. Noteworthy examples include:
1. Tata Ethical Fund: This fund offers diversified equity investments without exposure to banking and finance sectors. It caters to long-term investors seeking capital appreciation while adhering to Shariah principles.
2. Taurus Ethical Fund: Investors who prioritize Shariah-compliant equity and equity-related instruments will find this fund appealing. It aligns with Islamic investment principles and aims to achieve long-term capital appreciation.
3. Nippon India ETF Shariah BeEs: Formerly known as Reliance ETF Shariah BeES, this fund seeks to mirror the performance of the Nifty50 Shariah Index. It appeals to medium to long-term investors aiming for capital appreciation. A Demat account is required for investing in this ETF.
Conclusion:
For investors seeking a socially responsible approach to investing, Shariah-Compliant Mutual Funds offer a compelling choice.
The restrictions imposed by Shariah law lead these funds to focus on a specific sector of Shariah-compliant companies, with potential returns tied to their performance.
As with any investment, it is crucial for investors to carefully consider the pros and cons before embarking on their Shariah-compliant investment journey.
By aligning financial aspirations with ethical values, investors can contribute to a more responsible and sustainable future through Shariah-Compliant Mutual Funds.
Author
pluto team
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