Sharia investments are also known as Halal investments. They encourage people to invest in a socially-responsible way according to Islamic principles. These investments have to follow a detailed set of Sharia requirements and rules.
Shariah investments or Sharia compliant investments follow the principles of Islamic law. They encourage people to invest in a socially responsible way. There is a lot of scope for Shariah-compliant mutual funds in India because many Muslims believe that it is wrong to give or take interest on loans.
Here we will look at the goals of Shariah investment and the different investment options in India.
What are Sharia investments?
Sharia investments are also known as Halal investments. They encourage people to invest in a socially-responsible way according to Islamic principles. These investments have to follow a detailed set of Sharia requirements and rules. A considerable effort is necessary to ensure that investments follow Sharia principles.
Investments in gambling, alcohol, weapons, pork products, smoking, pornography, etc., are not permitted. A Sharia board ensures compliance with rules, and there is an annual Sharia audit. Certain types of income, like interest, must be purified through donations to charity.
Islam encourages investments, trade, and charity. It disapproves of receiving and giving interest, or Riba, which is considered to be exploitation. Shariah rules do not allow people to earn a fixed income, like interest. They also caution against too much speculation.
Anyone who believes in socially-responsible investing can invest in Sharia mutual funds. Unfortunately, there are very few Shariah-compliant mutual funds in India.
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At present, there are three Shariah-compliant mutual funds/ETFs in India:
- Reliance ETF ShariahBeES
- Taurus Ethical Fund
- Tata Ethical Fund
The Reliance ETF ShariahBeES is an exchange-traded fund (ETF). It invests in the Nifty 50 Sharia Index. The Taurus Ethical Fund and the Tata Ethical Fund are open-ended, actively-managed, multi-cap funds. They both have the Nifty 500 Shariah TRI as their benchmark.
Also Read: Mutual Funds Vs. ETFs: Where to invest?
What is the Sharia Index?
The Sharia Index can be the basis for Sharia-compliant investment products. These products attract Muslims who want to invest without violating Sharia principles. They avoid investing in companies that engage in activities that Islam does not allow.
The NIFTY 50 Shariah Index is based on the Nifty 50 Index. Companies that follow Sharia principles are part of the NIFTY 50 Shariah Index. The NIFTY 50 Shariah Index tracks the performance of the parent index.
The NIFTY 500 Shariah Index is based on the Nifty 500 Index. Companies that follow Sharia principles are part of the NIFTY 500 Shariah Index, which tracks the performance of the parent index.
Reliance ETF ShariahBeES
This ETF aims to provide returns that correspond with the total returns of the Nifty 50 Shariah Index. It does this by investing in securities that make up the Nifty 50 Shariah Index in the same ratio as the index. Its benchmark is the Nifty 50 Shariah (TRI).
It suits investors seeking capital growth by investing in the Nifty 50 Shariah Index. However, the fund’s website states that it is not a Shariah-compliant scheme.
According to Value Research, this unrated exchange-traded fund (ETF) is in the equity large cap category. Its assets were worth ₹3 crores, and it had an expense ratio of 1.16% as on February 28, 2019. It’s one-year, three-year, and five-year returns as on March 26, 2019, are given below:
Taurus Ethical Fund
The Taurus Ethical Fund is a multi-cap fund, which invests according to the Islamic investment philosophy. The fund manager uses specific screening norms to pick companies.
It invests in stocks from the S&P BSE 500 Shariah Index. The excluded sectors are financials, banks, tobacco, alcohol, gambling, pork, pornography, etc.
This fund suits investors seeking long-term capital appreciation from Sharia-compliant investments. Its benchmark is the S&P BSE 500 Shariah TRI.
According to Value Research, this unrated mutual fund is in the equity thematic category. Its assets were worth₹36 crores as on February 28, 2019, and it had an expense ratio of 2.60% as on January 31, 2019. It’s one-year, three-year, and five-year returns as on March 26, 2019, are given below:
Tata Ethical Fund
This fund aims to provide capital appreciation from Shariah-compliant, diversified equity investments. It invests in growth and value-oriented companies, and its benchmark is the Nifty 500 Shariah TRI.
The excluded sectors are casinos/gaming, alcoholic beverages, and non-halal food products, etc. Investments are not allowed in financial institutions that earn from interest (Riba).
It invests in companies with low leverage and avoids companies with high debt-to-equity ratios. A Sharia adviser ensures purification of any prohibited income every year. It suits investors who want to invest in a Sharia-compliant mutual fund.
The Tata Ethical Fund has obtained Shariah compliance certification. This certification is from Taqwa Advisory and Shariah Investment Solutions (TASIS).
Which of these mutual funds/ETFs is right for me?
Reliance ETF ShariahBeES may be the right choice if you want to invest in the Nifty 50 Shariah Index. However, this fund’s website states that it is not a Sharia-compliant scheme. It invests in the Nifty 50 Shariah Index and is suitable for passive investors who want to get returns that beat inflation.
You will have to open a Depository and Trading Account to invest in the Reliance ETF ShariahBeES. Liquidity may be inadequate because of low trading volumes in this ETF. One of the reasons for this is the lack of awareness about this ETF within the community.
The Taurus Ethical Fund and the Tata Ethical Fund are actively-managed multi-cap funds. They may offer higher returns than an ETF as they can invest across market caps. You will not have to open a Depository and Trading Account to invest and will enjoy much more liquidity.
Conclusion
Sharia funds suit people who want to invest according to the principles of Islam. These mutual funds do not invest in companies that deal with prohibited products and services. Earning interest and too much speculation are also not allowed. An actively-managed, multi-cap, Sharia-compliant mutual fund may offer higher returns than an ETF.
