What are Shariah-compliant mutual funds?

Summary: Shariah-compliant mutual funds follow Islamic investing principles, which makes them work a bit differently from regular funds. This story breaks down what those rules mean in practice and why they can shape the kind of companies these funds invest in. Shariah-compliant funds are mutual funds that invest according to Islamic principles rather than only conventional financial filters. In India, that means the fund universe is narrowed by sector exclusions, financial-ratio screens and a ban on many interest-linked instruments, so these funds are better understood as a constrained equity strategy rather than as a standard diversified equity fund. How do Shariah funds work in practice? A Shariah fund does not simply avoid investing in alcohol or tobacco-based businesses. It also limits exposure to businesses where interest income or interest-bearing debt becomes too significant, and it typically avoids conventional banking and many derivatives-led structures. For instance, the Tata Ethical Fund’s scheme document says it will invest only in a ‘Shariah Compliant Universe' and exit a stock if its compliance status changes; Taurus Ethical Fund similarly defines its mandate around an ethical or Shariah-based equity universe. That filtering changes portfolio construction in a very real way. Tata Ethical Fund’s current scheme information document shows 80 to 100 per cent of net assets in equity and equity-related instruments of Shariah-compliant companies, with up to 20 per cent in other Shariah-compliant instruments, including cash. In other words, this is still an equity fund, but with a narrower investable basket than a broad-market diversified equity scheme. What options do investors currently have in India? India’s listed Shariah-oriented mutual fund universe remains very small. Value Research’s explainer names three av

This article was originally published on December 20, 2022, and last updated on March 11, 2026.