Shariah-compliant mutual funds are investment funds that adhere to the principles of Islamic law (Shariah). These funds avoid investing in businesses involved in activities considered haram (forbidden) under Islamic principles, such as alcohol, gambling, tobacco, and interest-based financial services.
Have you not heard about this before? Well, in this blog, you will get all the information regarding Shariah mutual funds, including how they work, advantages, key criteria, how to choose the right one and tax implications. Let’s get started!
What are Shariah-Compliant Mutual Funds?
Shariah-compliant mutual funds are investment funds designed for Islamic investors, following Islamic principles. These funds avoid investing in shares related to industries like gambling, alcohol, and conventional banking. These mutual funds follow strict ethical guidelines.
A panel of Islamic scholars and financial experts oversees these funds to ensure they meet Shariah laws. These investments focus on ethical, interest-free securities, promoting profit-and-loss sharing instead of fixed interest. In India, Shariah-compliant mutual funds offer a halal investment option for those who want to grow their wealth while staying true to their religious values.
How to Choose the Right Shariah-Compliant Mutual Fund?
Choosing the right Shariah-compliant mutual fund requires careful consideration. Look for funds that strictly adhere to Islamic principles, avoiding investments in prohibited sectors like alcohol, gambling, and interest-based finance. Verify that the fund has a robust Shariah advisory board and transparent screening processes. Also, consider the fund’s historical performance, expense ratio, and the reputation of the fund house to ensure it aligns with your financial goals while upholding your ethical values.
How Does Shariah-Compliant Mutual Fund Work?
Shariah-compliant funds follow Islamic principles to ensure ethical and interest-free investing. These funds operate through a structured process that aligns with Shariah law. Here is how it works:
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Screening for Compliance
A Shariah supervisory board, which contains Islamic scholars and financial experts, reviews the fund’s investments. They ensure the portfolio does not include businesses involved in prohibited activities like:
- Alcohol, tobacco, and gambling
- Weapons manufacturing
- Pork-related products
- Conventional banking and financial institutions that earn or pay interest
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Ethical and Socially Responsible Investing
Shariah-compliant mutual funds focus on companies that contribute positively to society and maintain ethical business practices. They avoid firms that generate income through interest-based transactions or unethical activities.
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Profit-and-Loss Sharing
Instead of earning fixed interest (which is forbidden in Islam), these funds operate on a profit-and-loss sharing model. Investments are made in halal (permissible) businesses, where returns come from business growth and performance rather than interest payments.
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Continuous Monitoring
The Shariah board regularly audits and monitors the fund to ensure continued compliance with Islamic principles. If a company in the portfolio no longer meets the criteria, the fund manager removes it and reinvests in a compliant company.
Benefits of Investing in Shariah Based Mutual Funds
These are the benefits of investing in a Shariah-compliant Mutual Fund:
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Ethical and Responsible Investing
Shariah-compliant funds ensure that investments align with ethical and socially responsible values. They exclude industries such as alcohol, gambling, and interest-based banking and allow investors to grow their wealth while staying true to their beliefs.
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Diversification of Investments
These funds invest in a wide range of Shariah-compliant businesses across different sectors, which reduces risk and increases potential returns by spreading investments across multiple industries.
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Expert Fund Management
Shariah-compliant mutual funds are managed by professionals who specialise in both Islamic finance and conventional investment strategies. Their expertise helps investors make informed and strategic financial decisions.
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High Transparency and Regular Oversight
A dedicated Shariah advisory board regularly reviews and audits the fund’s investments. This ensures that all holdings remain compliant with Islamic principles, giving investors confidence in the fund’s transparency and adherence to ethical guidelines.
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Potential for Long-Term Growth
Since Shariah-compliant funds focus on companies with strong financial health, low debt, and stable business models, they can offer steady growth over time while avoiding speculative and high-risk activities.
Key Criteria for Shariah-Compliant Funds
To consider a mutual fund to be Shariah-compliant, it must follow specific rules that align with Islamic financial principles. These guidelines ensure that investments remain ethical and free from prohibited activities.
- Limited Debt in Companies
The fund can only invest in companies whose total debt is less than 25% of their total assets. Businesses with high debt levels are not eligible for investment.
- Minimal Interest Income
Since finding a company with zero interest income is difficult, the fund is allowed to invest in businesses where interest income does not exceed 3% of total earnings.
- Restricted Industries
Shariah-compliant mutual funds avoid investing in companies engaged in:
- Bank and financial services
- Insurance
- Alcohol, tobacco, and pork-related products
- Gambling, nightclubs, and adult entertainment
By following these rules, Shariah-compliant mutual funds ensure that investments remain ethical, interest-free, and aligned with Islamic values.
How to Choose the Right Shariah-Compliant Mutual Fund
Examples of Shariah-Compliant Funds
Follow this table to learn some popular examples of Shariah mutual funds:
| Fund Name | 1 Year Return | 3 Year Return | 5 Year Return | Returns Since Inception |
| Tata Ethical Fund | 5.6% | 10.0% | 17.5% | 16.1% |
| Taurus Ethical Fund | 7.3% | 15.5% | 19.0% | 15.8% |
| Nippon India ETF Shariah BeEs | 0.6% | 5.4% | 14.4% | 13.9% |
Note- These are not investment recommendations. Always do your own research before investing in a mutual fund.
Tax Implications of Shariah-Compliant Mutual Funds
In India, the tax implications of Shariah Mutual Funds are the same as other mutual funds:
- Taxation Category: If the fund primarily invests in equities (at least 65% of its total assets), equity taxation norms apply. Otherwise, non-equity taxation rules will apply.
- Short-Term Capital Gains (STCG): Gains from units held for 12 months or less are taxed at 20%.
- Long-Term Capital Gains (LTCG): Gains exceeding ₹1.25 lakh from units held for more than 12 months are taxed at 12.5%.
- No Tax Deductions: Investments in Shariah-compliant funds do not qualify for tax deductions under Section 80C.
Final Thoughts
Shariah-compliant mutual funds offer a unique investment avenue for those seeking to align their financial choices with Islamic principles. By adhering to Shariah law, these funds provide an ethical investment option, screening out companies involved in activities like alcohol, gambling, and interest-based finance.
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