Shariah Compliant & Halal Mutual Funds in India

Shariah-compliant mutual funds are investment vehicles that adhere to Islamic principles and laws are known as Shariah mutual funds or halal mutual funds in India. This funds make them a viable option for Muslims who wish to invest in a way that aligns with their faith. These funds follow guidelines set by Shariah law, which dictates how financial transactions should be conducted, particularly concerning the avoidance of interest (Riba), excessive uncertainty (Gharar), and investments in businesses that are considered haram (forbidden), such as those involved in alcohol, gambling, or pork products. In this article we will be discussing everything about Shariah-Compliant Or Halal Mutual Fund in India. 

List of Shariah-Compliant Or Halal Mutual Fund in India

But before we get into the details of these Shariah-compliant mutual funds or halal mutual funds, it is important to understand what Shariah is and what is the Shariah Law.

What is Shariah Law?

Islamic Law better known as the Shariah Law is a religious law that forms a part of the Islamic tradition. It is derived from the religious precepts of Islam, particularly the Quran and the hadith. In Arabic, the term Shariah refers to God’s divine law.

What are Shariah Compliant Mutual Funds?

Shariah Compliant Mutual Funds was introduced in India in 2010 It is relatively a new category in mutual funds that focus on socially responsible investing in accordance with Shariah Law and principles. Shariah serves as a moral code for the Muslim community, guiding their financial activities and prohibiting certain types of investments that are against islamic principles. They are specially designed for muslims community.

 S&P was the first company to launch Shariah indices in India in 2010. The two indices that were launched for Shariah Compliant Mutual Funds were:

• S&P CNX 500 Shariah
• S&P CNX Nifty Shariah

Key features of Shariah-Compliant Mutual Funds Or Halal Mutual Fund 

1. Ethical Screening: These funds undergo a rigorous screening process to ensure that the companies they invest in comply with Shariah principles. This involves excluding companies involved in activities that are haram, such as alcohol production, gambling, and interest-based financial services.
2. No Interest-Based Investments: Shariah-compliant funds avoid investments in interest-bearing instruments like bonds or fixed deposits. Instead, they focus on equity investments, real estate, and commodities that do not involve interest.
3. Purification of Income: Any income that may have been inadvertently derived from non-compliant sources is purified by donating a portion of it to charity. This process ensures that the income earned is halal.
4. Shariah Advisory Boards: These funds are usually overseen by a Shariah advisory board, consisting of scholars who ensure that all investments and practices comply with Islamic law. They provide guidance on which stocks or sectors are permissible and oversee the fund's compliance with Shariah.

Read Also: What is Bharat Bond ETF

Benefits of Shariah-Compliant Mutual Funds Or Halal Mutual Fund

1. Ethical Investment: For Muslims, these funds provide an opportunity to invest in a manner consistent with their faith, ensuring that their money is not used in activities that are forbidden in Islam.
2. Diversification: Like conventional mutual funds, Shariah-compliant funds offer diversification across various sectors and industries, reducing the risk associated with investing in a single asset class.
3. Professional Management: These funds are managed by professional fund managers who are experienced in selecting Shariah-compliant investments, providing investors with peace of mind that their investments are being handled in accordance with Islamic principles.
4. Long-Term Growth: Shariah-compliant funds often focus on equity investments, which have the potential for long-term growth. By investing in companies that are ethically sound and financially stable, these funds aim to deliver competitive returns over time.

Best Shariah Compliant & halal mutual funds in India

Here are some most prominent Shariah-compliant mutual funds  or halal mutual funds in India: Tata Ethical Fund, Taurus Ethical Fund, Nippon India ETF Shariah BeEs, and Reliance ETF Shariah BeES.

1. Tata Ethical Fund

Tata Ethical Fund is one of the leading Shariah-compliant mutual funds in India, managed by Tata Asset Management. The fund aims to provide long-term capital appreciation by investing in a diversified portfolio of Shariah-compliant companies.

• 1-Year Return: 32.51%
• 3-Year Return: 17.25%
• 5-Year Return: 22.85%

Tata Ethical Fund has consistently delivered strong returns across different time periods, making it a reliable choice for investors seeking Shariah-compliant investment opportunities. The fund's performance reflects its ability to identify and invest in companies that align with both ethical and financial criteria.

2. Taurus Ethical Fund

Taurus Ethical Fund is another prominent Shariah-compliant equity fund in India. Managed by Taurus Asset Management, this fund focuses on long-term capital growth by investing in Shariah-compliant stocks.

• 1-Year Return: 42.40%
• 3-Year Return: 18.31%
• 5-Year Return: 22.51%

Taurus Ethical Fund has shown exceptional performance, particularly in the last year, with a return of 42.40%. This fund's focus on high-growth sectors within the Shariah-compliant universe has contributed to its impressive returns, making it a competitive option for ethical investors.

3. Nippon India ETF Shariah Bees

Nippon India ETF Shariah BeES is an exchange-traded fund (ETF) that tracks the Nifty50 Shariah Index. Managed by Nippon India Mutual Fund, this ETF provides exposure to a basket of Shariah-compliant stocks, allowing investors to benefit from the growth of these companies.

• 1-Year Return: 31.69%
• 3-Year Return: 10.93%
• 5-Year Return: 18.02%

Nippon India ETF Shariah BeES offers a relatively lower return compared to other Shariah-compliant funds, especially in the 3-year and 5-year periods. However, as an ETF, it provides liquidity and ease of trading, making it an attractive option for investors looking for flexibility in their investments.

4. Reliance ETF Shariah BeES

Reliance ETF Shariah BeES is another ETF that tracks the Nifty50 Shariah Index, providing investors with a similar investment strategy to Nippon India ETF Shariah BeES. It is managed by Reliance Mutual Fund.

• 1-Year Return: 31.69%
• 3-Year Return: 10.93%
• 5-Year Return: 18.02%

Reliance ETF Shariah BeES mirrors the performance of the Nippon India ETF Shariah BeES, offering the same returns over 1, 3, and 5-year periods. This ETF is suitable for investors who prefer the simplicity and transparency of an index-tracking fund.

Both these funds invest in equities across categories, with the restrictions of the Shariah Law. Other than these, investing in gold is considered a halal mutual fund in India. However, as most gold funds invest some portion of their money in fixed-income securities, it is ethically not an option. However, one may consider investing in a Gold ETF.

Shariah-Compliant Investment Rules:

• Islam says not to invest in things that can hurt people or the environment.
• Investing in businesses that sell harmful stuff like cigarettes, alcohol, guns, and more is not allowed in Islamic finance.
• Muslims should stay away from Riba, which is like unfair money-making. It's a no-no according to the Quran.
• So, they can't invest in companies that do Riba or any kind of harmful stuff.
• Instead, the profits go to charity.
• Islamic funds don't invest in things that promise a fixed profit.
• They avoid companies with a lot of debt, so it's less risky.
• But anyone, not just Muslims, can invest in these kinds of funds.

Who can Invest in Halal Shariah-compliant Mutual Funds?

Even though the investments done by a Halal mutual fund are as per the Shariah law, any individual, NRI, company or HUF is permitted to invest in these funds.

How are Shariah-compliant Mutual Funds Taxed? Are there any special benefits?

As of now, there are no special tax benefits for investors in Shariah-compliant mutual funds or halal mutual funds. Since both the funds mentioned above are equity-oriented funds, they are taxed as per the rules of taxation for equity-oriented funds. In the case of holdings of less than 1-year, any gains accrued are considered short-term (STCG). Such STCG is taxed at a rate of 15%. In the case of holdings of 1-year or more, the capital gains are considered long-term in nature and hence long-term capital gains (LTCG) tax is applicable. The tax rate for such gains is 10%. However, gains up to Rs.1,00,000 in every financial year are free of tax.

In the case of a gold fund, the holding period for gains to be deemed long-term is 3 years. 

In case of redemption before 3 years from the date of purchase of the units, the gains are considered short term. The gains accrued are added to one’s income and taxed at the prevailing tax rate. For long term holdings, the gains are taxed at a rate of 20% with the benefit of indexation.

Challenges of Shariah-Compliant Mutual Funds or Halal Mutual Funds

1. Limited Investment Universe: The stringent screening process reduces the number of available investment opportunities, which can limit diversification and potentially impact returns.
2. Higher Management Costs: The additional costs associated with Shariah compliance, such as the fees for Shariah advisory boards and purification processes, can lead to higher management fees compared to conventional mutual funds.
3. Market Volatility: Since Shariah-compliant funds primarily invest in equities, they are more susceptible to market volatility. Investors must be prepared for short-term fluctuations in the value of their investments.
4. Awareness and Accessibility: Many Muslim investors may not be aware of the availability of Shariah-compliant funds, or they may find it challenging to access these funds, particularly in regions where Islamic finance is not well-developed.
5. Interest-Free Businesses: It might be hard to find an enterprise that generates 100% interest-unfastened sales. Therefore, halal mutual funds spend money on corporations whose interest income accounts for three percent of their basic revenue.
6. The ratio of Total Debt to Assets: Halal Mutual Fund isn't authorized to put money into businesses whose general debt exceeds one-fourth of their total assets.
7. Restricted Trade: Shares of organizations engaged in monetary services, consisting of coverage companies and banks, can't be purchased by way of this fund. Additionally, the halal mutual fund isn't authorized to spend money on groups that produce pork, cigarettes, alcohol, or nightlife-associated sports like playing or pornography.

Conclusion

Shariah Compliant & Halal Mutual Funds Mutual Funds are socially responsible investments, specially designed for Muslim investors so that they can engage in the market and take profitable returns. These funds strictly abide by the principles of Shariah Law, ensuring that all investments are aligned with the ethical and moral guidelines of the Muslim faith. This enables muslims investors to participate in the market while taking care of their religious beliefs.

Frequently Asked Questions (FAQs)

Q. What is a Shariah-compliant mutual fund?

A. The mutual funds which allocate their assets in securities as per the shariah law are known as Shariah mutual funds or halal mutual funds.

Q. What is the Shariah Law?

A. Shariah law is based on Islamic Law and has some restrictions with regard to businesses which are as under:

• One of the principles of the law states that one should avoid gambling as it has been considered a sin as per Islamic Law. So, investments in high-risk companies are restricted for individuals following the law as it has been considered as an equivalent to gambling.
• The law places a ban on the payment of interest against loans as it is considered unfair & morally unjustified. Because of this reason, individuals share the profits by forming partnerships or ownerships instead of paying interest.
• It has restricted investment in some businesses like gambling, alcohol, tobacco, and drugs as these are considered immoral.

Q. What is the minimum investment in a Shariah - compliant Mutual Fund?

In the case of a lumpsum investment, the minimum investment is Rs. 500. However, in the case of SIPs, one may start with an investment of only Rs. 100, payable periodically.

Q. What is the benchmark?

Some of the benchmark indices are:

• S&P BSE 500 Shariah Index
• Nifty 500 Shariah Index
• Nifty 50 Shariah Index

Q. Who can invest in the Shariah mutual funds?

A. These mutual funds are based on the shariah law. However, anyone who wants to invest as per this law can consider investing in these mutual funds.

Q. Can an investor from any religion invest in these funds?

A. Yes, an investor from any religion can invest in these mutual funds. These mutual funds are not restricted to only Islamic people or investors.

Q. Do Shariah mutual funds give any tax benefits?

A. No, Shariah mutual funds do not give any tax benefits. These mutual funds are not considered as a tax-saving instrument as per the Income Tax Act, of 1961.

Q. What is the minimum amount to invest in Shariah mutual funds?

A. The minimum amount of investment varies from fund to fund as it is not the same for every scheme.

Q. Which Shariah mutual funds are available to invest in India?

A. Some Sharia-compliant schemes available to invest are:

1. Tata Ethical Fund
2. Taurus Ethical Fund
3. Nippon India ETF Shariah Bees
4. Reliance ETF Shariah BeES

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