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Funds that are Profitably Ethical

Excluding banking and finance from its portfolio has worked for the ethical funds category

Ethical funds as a category is miniscule with the total assets managed by three funds in this category at a meagre ₹135.27 crore as on Dec 31, 2013. These funds have a clear exclusion list; they do not invest in companies that are engaged in meat processing and packaging, production of liquor, tobacco, leather goods and pesticides among others such as avoiding companies involved in gambling and the banking industry.

The performance of these funds largely rests on how the sectors that they exclude fares. For instance, in the past one year as the banking sector got hammered; ethical funds gained. Fund managers attribute this performance to select sectors that did well according to them. Says Sadanand Shetty, fund manager, Taurus Ethical fund; “Our investment team filters out best ideas from a restricted list of Shariah universe depending upon the underlying economic cycle.”

The ethical universe
The CNX 500 Shariah Index is the initial universe for Taurus Ethical Fund. The final stock selection is from this universe when each company's audited annual report is reviewed to ensure that the company is not involved in any non-Shariah compliant activities. Screening also takes place based on financial ratios; for instance, companies with 33 per cent or more debt or those where non-operating interest income is greater than 5 per cent of gross revenue are typically rejected.

The stock universe does have a bias for companies with free cash flow, low gearing and high governance. Besides, there are companies from industrial and engineering sector, which throws up a large number of mid cap ideas. “We have also made many tactical bets across many mid-cap companies from this universe,” adds Shetty.

Says Pradeep Gokhale fund manager, Tata Ethical Plan A; “Strict filters that we follow only get high quality companies which are less volatile in nature. In terms of portfolio construction we have invested in stocks which have growth potential, a strategy that worked for us.” These factors alone have not been the reason for these funds' out performance; they have also done well because of bets in sectors like pharma and technology that did well. “We had good exposure to the pharma stocks, but we could have increased our exposure to mid-cap IT, which was a missed opportunity,” adds Gokhale.

Whether you believe in following the ethical parameters set by these funds or not, such funds are a good addition for conservative investors. However, they do come with the flipside of excluding the banking sector completely, which would result in a drag in performance the moment the banking sector gains or the overall markets start to go up. Invest only if you believe in the strategy adopted by these funds, as they do well when the overall markets are down.

Strong Performance

Return (%)
FundsRatingCategory1-year3-year5-yearAUM (₹crore)
Taurus Ethical3/5Multi Cap44.7711.4514.6119
Tata Ethical Plan A5/5Multi Cap38.5315.5618.21131
Goldman Sachs CNX Nifty Shariah BeESNot RatedETF33.1110.888.670.77
Data as on June 11, 2014