What Are Shariah Compliant Mutual Funds?

In Islam, there is a huge prevalence of Shariah laws and it is followed across different sects since it is derived from their holy religious text – Quran and the sayings of the holy prophet, Muhammad in Sunnah and Hadith. According to Shariah laws, there are restrictions regarding investing money, and this is why there are Shariah-compliant funds.

Introduction to Shariah-compliant mutual funds

Since there are traditional Muslim investors who invest a lot of money in financial instruments like mutual funds, equity markets, and debt markets, there are certain funds that are maintained in accordance with Shariah laws and their traditions. These funds are usually known as Shariah-compliant mutual funds.

There are many misconceptions regarding Shariah-compliant funds like only Muslims can invest in these funds or these funds cannot generate great returns. Hence, in this article, we will talk about restrictions with respect to Shariah laws.

Restrictions in investing according to Shariah Laws

There are many restrictions when it comes to making investments according to Shariah laws, and this is the reason why what are Shariah-compliant funds has become relevant in the last few years. These restrictions are more fundamental in nature and are enumerated below:

  • There should be no interest: Islamic culture is highly dependent on ownership of assets, and that is why the culture of interest against loans does not appear. Hence, it is considered immoral and highly unjust.
  • Certain businesses are forbidden: Businesses that invest in gambling, casino, alcohol, drugs, and other immoral trades like weapon manufacturing, etc., cannot be a part of Shariah-compliant funds.
  • Total Debt to Asset ratio: If the business has a total debt that is one-fourth or more of its total assets, Shariah laws prevent investors from being invested in it.
  • High-risk involvement is prohibited: If you ever hear about Shariah-compliant funds that have a high-risk component, kindly stay away as these funds cannot have high-risk elements since it is close to gambling, which is prohibited in Islam.

Features of Shariah-compliant funds

An important aspect of Shariah-compliant funds is that these let youinvest in mutual funds by staying in the boundaries of Shariah laws, and some of the other notable features are:

  • The interest earned on these funds is distributed to charity.
  • People from all religions can make investments in these funds without any worries.
  • These funds do not invest in a business with direct and indirect involvement in the selling of pork, pornography, military equipment, tobacco, and other restrictions as mentioned above.

There are many Shariah-compliant funds in the market, like Tata Ethical Fund, Taurus Ethical Fund, Nippon India ETF Shariah BeEs, Goldman Sachs CNX Nifty Shariah Bees Funds, etc.