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Summary: As the Tata Ethical Fund completes three decades, we look at how this Shariah-compliant fund has performed since. We also understand what Shariah-based investing is and the opportunity costs of investing in such funds.
The Tata Ethical Fund, which completes 30 years this year, is the oldest Shariah-compliant mutual fund in India. Shariah-based investing follows a defined set of principles that bar investments in companies earning income through interest-based lending or operating in non-permissible activities. As a result, conventional banking and financial services are excluded, along with sectors such as alcohol, liquor, tobacco and cigarettes.
Given its distinct investment universe and strategy, we take a closer look at the Tata Ethical Fund’s portfolio allocation, its performance against broader market indices, and whether it deserves a place in your portfolio.
How does the fund invest?
Presently, the Tata Ethical Fund has 63 stocks in its portfolio. Of these, the top 10 stocks constitute nearly 35 per cent of the portfolio, indicating a moderately concentrated approach. At the sector level, the top three sectors account for just over 50 per cent of the fund’s equity exposure.
From a market capitalisation perspective, the fund remains tilted towards larger companies. Around 50 per cent of the portfolio is invested in large-cap stocks, while mid- and small-cap stocks account for approximately 31 per cent and 19 per cent, respectively.
In the absence of Banking and Financial Services, the fund invests more in sectors such as Technology (22 per cent), followed by Materials (17 per cent) and Healthcare (13 per cent). Consumer discretionary accounts for roughly 12 per cent of the portfolio, while Consumer staples accounts for close to 11 per cent.
The opportunity cost of excluding banking and financial stocks
Banking and financial services play a unique role in the equity market. Through lending across sectors, banks remain exposed to a wide range of economic activities, which often helps diversify sectoral risks over a full cycle. Excluding this segment removes that source of diversification from the portfolio.
More importantly, investors forego participation in one of India’s key growth engines. Over the past five years, large banks such as Bank of Baroda, State Bank of India and ICICI Bank have delivered strong growth rates, contributing meaningfully to broader market returns. By design, Tata Ethical Fund remains completely absent from these opportunities.
For investors without Shariah or similar ethical constraints, it is important to recognise and be comfortable with this permanent exclusion and the associated growth opportunity it leaves out.
How has the fund delivered in the past?
To evaluate how the Tata Ethical Fund has fared in the past, we decided to check its outperformance against its benchmark, the Nifty 500 Shariah Total Return Index and the Nifty 500 Total Return Index, based on three-year rolling returns.
Where does the Tata Ethical Fund stand versus the broader market?
We compare its outperformance to its parent index and the Nifty 500 TRI
|
|
Nifty 500 Shariah Total Return Index (%) | Nifty 500 Total Return Index (%) |
|---|---|---|
| Outperformance % | 44.4 | 50.5 |
| 0-2% outperformance | 29.6 | 18.7 |
| 2-4% outperformance | 14.6 | 16.4 |
| 4-6% outperformance | 0.1 | 10.2 |
| >6% outperformance | 0 | 5.2 |
| Data considered from January 2016 to January 2026, based on three-year rolling returns | ||
As seen from the above table, the fund outperformed the Nifty 500 Shariah TRI in 44.4 per cent of the rolling periods. Yet, the degree of outperformance was modest, since in nearly 30 per cent of the periods, the outperformance was limited to the 0-2 per cent range, while instances of outperformance beyond 2 per cent were around 15 per cent.
When compared with the Nifty 500 TRI, the fund’s outperformance improved marginally, with the fund beating the index in about 50.5 per cent of rolling periods.
To conclude, while the Tata Ethical Fund had decent average returns of around 15 per cent over both three- and five-year periods, it did not outperform its benchmark either on a consistent or decisive basis. Even strong stock-specific contributors such as K.P.R. Mill with a 106 per cent XIRR, Tata Elxsi with around 90 per cent returns and long-held positions like Bharat Heavy Electricals with high-conviction allocations above 1 per cent were not enough to tilt outcomes meaningfully above the benchmarks.
Is this Shariah-compliant worth investing in?
Though the Tata Ethical Fund has fared decently, it is important to keep in mind that it follows a Shariah-compliant mandate. As a result, sectors that are not aligned with its investing framework will be excluded, which may have a substantial impact on the fund’s returns.
For investors whose investment choices are guided by Shariah principles or similar ethical frameworks, the fund offers equity market exposure within those boundaries. In such cases, the exclusion of certain sectors and the associated opportunity cost are inherent to the investment decision rather than an unintended trade-off.
If you are feeling confused as to whether you should invest in this fund or any other, the Value Research Advisor App helps you pick suitable funds for better returns or steady income, backed by data and expert judgement, not guesswork.
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Also read: Nifty Smallcap 250 Quality 50 Index: Better or just a label?
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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