The Definitive Guide to Shariah-Compliant Mutual Funds in India

The Definitive Guide to Shariah-Compliant Mutual Funds in India

Investing in alignment with Islamic principles has become a growing priority for many Muslims. In India, Shariah-compliant mutual funds offer an ethical investment avenue by excluding activities and industries prohibited under Islamic law. These funds strictly adhere to principles such as avoiding riba (interest) and haram activities while supporting investments in ethical and permissible sectors.

This guide provides a comprehensive overview of Shariah-compliant mutual funds in India, covering their investment philosophy, performance, risk factors, and available modes of investment.

Does Islam Permit Investing in Mutual Funds?

Shariah-compliant investing in India is gaining momentum, backed by endorsements from prominent Islamic institutions. The Darul Uloom Deoband, along with scholars from other schools of thought, has permitted investments in mutual funds under specific conditions. It is deemed permissible to invest in mutual funds that allocate shareholders' money exclusively to companies dealing in halal items, provided the companies are established and their assets are non-liquid.

These rulings have offered much-needed clarity and reassurance to Muslims seeking to align their financial goals with Islamic principles.

What Are Shariah-Compliant Mutual Funds?

Shariah-compliant mutual funds are designed to align with Islamic financial principles. They exclude investments in sectors or companies involved in activities such as alcohol, gambling, pork, tobacco, conventional banking, and weapons manufacturing. Instead, they focus on ethically and financially sound companies adhering to strict Shariah guidelines.

Key Principles:

• Investments focused on equity and tangible assets.
• Avoidance of riba (interest-based income).
• Exclusion of haram (prohibited) industries.
• Screening for ethical financial ratios (e.g., debt-to-asset ratio).

For Muslims aiming to balance faith and finance, Shariah-compliant mutual funds offer a way to grow wealth while adhering to religious obligations. These funds are managed under strict supervision by experts in Islamic finance and Shariah law.

Why Shariah-Compliant Investing Matters for Muslims

Islam encourages ethical wealth generation, responsibility, and avoiding harm to society. Conventional financial instruments, often reliant on interest or investments in industries that conflict with Islamic values, pose a challenge for Muslims seeking to align their financial growth with their religious principles.

Shariah-compliant funds address this challenge by enabling Muslims to meet important financial milestones, such as saving for retirement, funding education, or building long-term wealth, all while adhering to Islamic teachings. These funds provide an opportunity for financial growth that respects both faith and ethics.

Importantly, Shariah-compliant mutual funds have proven to be not only ethical but also financially rewarding over time.

Overview of Shariah-Compliant Mutual Funds in India

India has a limited but growing selection of mutual funds that follow Shariah-compliant investment guidelines. These funds are managed by leading asset management companies (AMCs). While some have obtained formal Shariah certification, others adhere to the principles but are yet to complete the certification process. Here’s a closer look at some popular options:

1. Tata Ethical Fund
2. Taurus Ethical Fund (Yet to be certified)
3. Quantum Ethical Fund

Each fund has distinct characteristics catering to various investor preferences, ranging from active equity management to passive index tracking.

Detailed Reviews of Popular Shariah-Compliant Funds

1. Tata Ethical Fund:

The Tata Ethical Fund has historically delivered strong long-term performance, consistently outpacing several traditional equity funds. Its diversified portfolio, focusing on sectors like IT, pharmaceuticals, and chemicals, aligns well with Shariah principles. Investors seeking a Shariah-compliant mutual fund for wealth creation over the long term have found it to be a reliable option. The Tata Ethical Fund is among the few funds with an official Shariah compliance certificate, certified by TASIS (Taqwaa Advisory and Shariah Investment Solutions).

• Type: Equity Fund
• Investment Strategy: Diversifies across Shariah-compliant sectors like IT, healthcare, and FMCG.
• Minimum Investment: ₹5,000 (Lump-Sum); ₹500 (SIP).
• Risk Profile: High.

2. Taurus Ethical Fund

The Taurus Ethical Fund follows Shariah-compliant investment guidelines and is currently undergoing a Shariah audit by ShariahCap Advisors to obtain formal certification. Investors may wish to keep track of this process for confirmation of compliance.

• Type: Equity Fund
• Investment Strategy: Invests in companies adhering strictly to Islamic finance norms.
• Minimum Investment: ₹5,000 (Lump-Sum); ₹500 (SIP).
• Risk Profile: High.

3. Quantum Ethical Fund

The Quantum India ESG Equity Fund is a recent entrant into the market, combining the principles of Shariah compliance with a focus on environmental, social, and governance (ESG) factors. As a newly launched fund, it presents an opportunity for investors to support sustainable and ethically aligned businesses. Quantum Ethical Fund is certified by ShariahCap Advisors, offering an option for investors seeking funds that align with Islamic financial principles. Its performance and broader market impact are yet to be established. Investors seeking both faith-aligned and ESG-conscious portfolios should monitor its development closely.

• Type: Equity Fund
• Investment Strategy: Focuses on Shariah-compliant stocks while adhering to ethical investment standards.
• Minimum Investment: ₹500 (Lump-Sum or SIP).
• Risk Profile: High.

Features of Shariah-Compliant Mutual Funds

• Oversight by Shariah Boards: Shariah boards comprising Islamic scholars and finance experts ensure compliance with Islamic laws.
• Halal Screening: Investments are filtered to exclude haram industries and include sectors like healthcare, technology, and manufacturing.
• Debt-Free Focus: Companies with excessive debt or interest income are excluded. Total debt cannot exceed one-fourth of total assets.
• Purification Mechanism: Any non-compliant income, such as minimal interest income, is purified through charitable donations.
• Profit-and-Loss Sharing: Encourages risk-sharing between companies and investors instead of fixed-interest returns.

How to Choose a Shariah-Compliant Fund

• Ease of Access: Check the platforms and methods available for investing. Online trading platforms like Zerodha or Groww provide convenience, but ensure they align with your preferred style of investment.
• Evaluate Fund Philosophy: Review the fund’s methodology for stock selection. It is crucial to ensure the fund adheres to rigorous Shariah-compliance screening. Look for third-party Shariah boards or certificates verifying compliance.
• Performance History: Assess the fund’s historical returns over different time horizons. A consistent track record indicates good management, but also consider the overall market conditions during those periods.
• Expense Ratio: A lower expense ratio is preferable as it directly impacts your net returns. Compare the expense ratio of the fund with similar products in the market to avoid excessive costs.
• Risk Profile: Equity-based funds generally involve higher risks. Consider your investment horizon and risk appetite—equity funds suit long-term growth, while ETFs might work better for shorter-term goals.
• Assess Diversification: Check if the fund’s portfolio is well-diversified across compliant industries to mitigate sector concentration risks.
• Tax Implications: Consult tax experts to understand the tax treatment of these funds, as they generally follow the same taxation rules as conventional mutual funds.

Challenges in Shariah-Compliant Investing

• Market Volatility: Most Shariah-compliant funds focus on equities, which are inherently volatile. Investors should be prepared for fluctuations and align their investment goals accordingly.
• Limited Availability: Shariah-compliant funds are few in India, restricting investor choices. Investors may face difficulties in finding funds tailored to their goals, requiring extra effort to explore available options.
• Lack of Awareness: Many potential investors are unaware of these funds due to limited outreach and financial literacy. Educating oneself about halal investing is essential to make informed decisions.
• Sector Concentration Risk: Since Shariah-compliant funds exclude certain industries, they are often concentrated in sectors like IT, healthcare, and FMCG. This lack of diversification can make these funds more sensitive to sector-specific risks.
• Regulatory Uncertainty: Frequent changes in tax laws or SEBI regulations can affect fund performance or compliance criteria. Staying updated is crucial to understanding potential impacts on your investments.

Limited Participation in Shariah-Compliant Investments in India

Ashraf Mohamedy, Founder and CEO of Mumbai-based Idafa Investments, points out that less than 7% of Indians’ total savings have been invested in Shariah-compliant financial instruments. This marks an improvement from the mere 3% prior to the launch of the "Mutual Fund Sahi Hai" campaign in March 2017, which aimed to popularize mutual funds as a viable investment option. The COVID-19 pandemic further accelerated interest in equity investments, as individuals reassessed their financial strategies, leading to increased participation in mutual funds.

Mohamedy emphasizes the need for more targeted campaigns and awareness programs to boost investments in mutual funds, particularly among Muslims in India. He also advocates for Ulama to become Mutual Fund Distributors, suggesting that their involvement could not only drive change but also create additional income streams for them.

Future of Shariah Investments in India

The growing demand for ethical and sustainable finance among India’s Muslim population and beyond suggests a promising future for Shariah-compliant investments. Likely developments include:

• Expansion of Shariah Funds: More AMCs may introduce Shariah-compliant products to meet the growing demand.
• Islamic Bonds (Sukuk): This could become a viable halal investment option for income-seeking investors.
• Enhanced Financial Literacy: Greater awareness campaigns could empower more Muslims to adopt halal investing.

With fintech innovation and regulatory support, Shariah investments are set to become a significant niche in India’s financial market.

Shariah-compliant mutual funds allow Muslims to balance faith and finance, offering an ethical way to grow wealth in line with Islamic principles. With options like Tata Ethical Fund, and Quantum Ethical Fund, investors can ensure their portfolios remain halal while navigating India’s evolving financial landscape.

Disclaimer

The information provided in this article is based on publicly available data from respective fund websites, Scheme Information Documents (SID), and Key Information Memorandums (KIM). This article is for informational purposes only and does not constitute financial or investment advice. Readers are advised to conduct their own due diligence, consult financial advisors, and seek guidance from Islamic finance experts before making any investment decisions. The author and publisher are not responsible for any financial decisions made based on this article.