Shariah Compliant Funds: How are they different?
Premium- Shariah-compliant funds are socially responsible investing funds that are governed by the requirements of Shariah law and the principles of the Islamic religion
Shariah Compliant Funds are investment tools that are governed by the rules of the Shariah law of Islam. These are socially responsible investment funds in which any type of investment that harms an individual or the environment is not made. Even though these funds follow the moral code of Islam, an individual from any religion can invest in these funds.
Which securities are shariah-compliant?
There are strict rules that are to be adhered to for all investments made by a fund. A Shariah appointed board comprising Islamic scholars screens the companies that meet the principles, for every Shariah fund. The principles prohibit investment in any business related to alcohol, drugs, pork, weapons, or any immoral activity such as gambling. As a consequence of the rule which forbids gambling, investment in high-risk securities is also restricted.
READ MORE: What are Liquid Funds?
In Islam, income from exorbitant interest is considered unjust, thus investment in interest-bearing assets is not allowed. Since there are not many companies that are not interest-bearing, many boards may authorise investing in businesses with up to 3-5% interest of their total income. In addition, investments in companies that have more than 33% debt to equity ratio and less than 45% receivables are permitted.
How do investors earn through shariah compliant funds?
The answer is- through ownerships and partnerships. These funds generally invest in private equity, real estate, or ETFs. There are only limited options for investing in a Shariah-compliant fund in India. Tata Ethical Fund is the oldest Shariah-Compliant fund in India.
READ MORE: What is Fund of Funds (FoF)?
Shariah Compliant Funds are a suitable option for investors who wish to purchase only those securities that are environment-friendly and low-risk. As these funds are not limited to the followers of Islam, individuals of different faiths and beliefs who wish to invest in the assets that abide by the principles of social responsibility can freely trade in them.
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