Shariah compliant mutual funds: What are Shariah mutual funds? | Value Research What are Shariah compliant mutual funds? Are there any Shariah mutual funds in India? Let’s learn about the investment funds that adhere to Islamic religious tenets and Shariah regulations.
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What are Shariah compliant mutual funds?

Let's learn about the investment funds that adhere to Islamic religious tenets and Shariah regulations

Shariah compliant mutual funds: What are Shariah mutual funds?

Shariah compliant mutual funds are investment funds which are governed by the requirements of Shariah law and the principles of the Islamic religion. These Shariah mutual funds are considered a variant of socially responsible investing.

The Islamic law requires you to be ethically and socially responsible when it comes to investing your money. You must adhere to a certain set of rules if you want to invest in a way that is Shariah compliant.

The most commonly followed principles are as follows:

  • Prohibition of interest: Paying and receiving interest is prohibited under Islamic law and as such, investing in companies which earn interest income or pay interest is prohibited. However, it is impractical as every company earns interest in some form or the other or has borrowings on which they pay interest. Hence, limits are placed on the debt levels and interest income, and investments are made only in companies which meet the criteria. Investment in fixed income securities is also prohibited.
  • Prohibition to invest in certain businesses: Shariah prohibits investing in companies which derive majority of their income from sale of alcohol, pork products, tobacco, gambling and nightclub activities, abusive drugs, military equipment or weapons and other such products. It's also forbidden to invest in companies whose major income is interest income.
  • Prohibition against investing in anything but the "real" economy: It means that derivative products, hedge funds and structured products are excluded from the investable universe.

Shariah compliant mutual funds are those which follow the principles laid down by the Islamic law when it comes to investing. These funds invest only in companies which meet the required criteria for investing. At present, there are three shariah mutual funds in India available for investing, namely, Tata Ethical Fund, Taurus Ethical Fund and Nippon India ETF Nifty 50 Shariah BeES.


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