What Are Shariah Compliant Mutual Funds?

Shariah Law is a law for Muslims mentioned in the Quran and the hadith. It restricts its followers from doing a specific kind of business. Investing in mutual funds might be a breach of certain rules.

To encourage this minority to invest in funds, multiple companies have come up with mutual funds that completely abide by the Shariah Law. So, here we will read all about the Shariah Compliant Mutual Funds that fulfill their interests.

India has 6 main religions with Muslim, Sikh, Jain, Christian, Buddhist, and Zoroastrians having minority status. Each minority has its own beliefs and rituals, which they follow. Even in investing, there might be some situations where putting money in a scheme might be a breach of a rule/law mentioned in any of the religious texts.

Which Shariah Compliant Mutual Funds Are Available In India?

S&P was among the first to launch Shariah Mutual funds in India with the following names

• S&P CNX 500 Shariah
• S&P CNX NIFTY Shariah

But currently, three schemes are offering Shariah Complaint Mutual Funds:

• Tata Ethical Funds: – The scheme from TATA is best for investors looking for diversified investments. This is also great for people with less or no stocks and banking exposure. These funds give good returns in the long term. It is excellent for people wanting to invest in Equity and Equity related funds complying with Shariah law.
• Taurus Ethical Funds: – Similar to TATA ethical funds, these funds also comply with shariah law and invest according to the rules mentioned. They give great returns in long terms and also bear the low risk.
• Nippon India Shariah Bees: – Nippon India ETF generates money by investing in indexes similar to Nifty 50 Shariah Indexes. People seeking to invest for medium to long-range invest in these funds to obtain good profits. As these are ETF funds, for investing in it you need to have a Demat account. They are almost a carbon copy of S&P Nifty 50 Shariah; people having prior investments in it will be quite happy to invest in Nippon India Shariah Bees.

Which Of The ETF/Mutual Funds Is Right For Me?

Each of the mutual funds has its own set of features, making it usable for different kinds of people. Nippon India Shariah Bees is the ideal for choice for people who want to invest in Nifty 50 and wanting to get stable results for an extended period of beating inflation.

Nippon India Mutual funds require you to make a Demat account, and it is also low on liquidity because of the low trading values in ETF.

The other two Taurus and TATA ethical funds comply with the Shariah Law and give good returns. The investments are diversified with equity and equity-related funds with different market caps. You also don’t need to open a DEMAT account for investing in Shariah Mutual Funds.

Who Can Invest In Shariah Compliant Mutual Funds?

Shariah Compliant Mutual funds are compliant with shariah law. There are restrictions implied which are to be followed by every Muslim.

These are brought up mostly by the people following Shariah law or Muslims, but there are no restrictions as per the funds rule. Any Indian Citizen, NRI, or HUF’s are permitted to invest.

Minimum And Maximum Investment For Shariah Compliant Mutual Funds?

If you are trying to invest a lump-sum amount, then the minimum investment is 500Rs, and if you are trying to invest in SIP, then the minimum investment is 100Rs, which is invested monthly.

With respect to the maximum amount, there is no limit howsoever, on how much money you can invest.

What Is The Benchmark?

The benchmark used to compare Shariah mutual funds is S&P BSE 500 index. It compares the performances of the shariah funds with other funds.

They are specially designed to track the market performances of Shariah Mutual Funds.

Features Of Shariah Compliant Mutual Funds

According to Shariah Law Muslims cannot invest in all types of mutual funds; it has some restrictions for them to follow. Shariah-compliant mutual funds invest under Islamic boundaries.

1. Muslims are not allowed to invest anywhere involving harming people, either physical or emotional, or companies selling weapons, companies that harm the environment. Hence, Muslims are forbidden from investing in companies making a large amount of income using the sale of tobacco, drugs, alcohol, or weapons.

2. Muslims are also bound to avoid interest or Riba. Earing interest through any unfair means is considered as an engagement of war against god. So shariah funds avoid all the types interest, and the appointed Shariah Board distributes the interest to the poor and needy one’s

3. Mutual funds with a high level of risk are completely avoided, equity debt funds are also not included.

4. Shariah Mutual Funds also does not include investment in fixed -income streams.

5. Any individual is permitted to invest in Shariah mutual funds. It is a common misconception that only Muslims are allowed to invest.

Restrictions According To Shariah Law

For a mutual fund to be considered as a Shariah Compliant Mutual fund, certain restrictions have to be followed by the funds.

• Debt to Asset Ratio: – It cannot be invested in funds where the total debt is one fourth or greater than its total assets.
• Interest-Free Companies: – There are no companies that do not earn any income through interest; however, companies earning up to 3% interest are considered eligible to get invested.
• Restricted Business: – The funds are not eligible to get shares of the company getting a major portion of their income through the sell of liquor, drugs, gambling, nightclubs activity, etc.

Tax Benefits On Shariah Compliant Mutual Funds

Shariah-compliant mutual funds currently do not enjoy any tax benefits and the interest earned is taxed normally according to the prevailing tax rates.

Interest earned within 1 year is considered as short-term gains and are taxed at an interest rate of 15%. For gains up to 1,00,00Rs, they are treated tax-free. In the case of long-term gains where the period of holding is greater than 1 year, the earnings are taxed at an interest rate of 10%

In the case of investments in gold funds, the earnings are considered as long term if the period of holding is greater than 3 years. If the time of holding is less than 3 years, then they are considered as short-term investments.

Shariah Compliant Mutual Funds Schemes In Detail

1. TATA Ethical Funds:

This scheme was launched in 1996. The TATA funds invest in a diversified company based on the shariah law. All the mentioned schemes have a benchmark of Nifty 50 Shariah TRI.

Scheme strives to provide medium to long- term capital gains by investing in equity and equity-related instruments following shariah laws of well-researched value and growth-oriented companies.

Types Of The Plan You Can Select

Regular Plan (For applications brought by the Distributors):

• Growth
• Dividend

Direct Plan (For applications not availed through Distributors):

• Growth
• Dividend

The minimum amount for transactions:

Regular Plan & Direct Plan:

Minimum Amount for Purchase: Dividend Option: Rs. 5,000/- and in multiples of Re. 1/- after that. Growth Option: Rs. 5,000/- and in multiples of Re. 1/- after that.

For additional investment Rs. 1,000/- and in multiples of Re. 1/-.

The repurchase or switches from one scheme to another request can be made for a minimum of- Rs. 500/ or minimum of 50 units.

2. Taurus Ethical Funds:

Taurus Ethical funds are also popular due to its hassle-free application and easy terms

Types Of Plan

They come with 2 plans

• Regular Plan: This Plan is for investors who wish to do their investment via any distributor.
• Direct Plan: It shall be available for such investment applications that are not routed through a distributor.

All the features of the Direct Plan under Scheme like the investment strategy, risk factors, facilities offered load structure, investment objective, asset allocation pattern, etc. will be all the same except for a lower expense ratio in the scheme.

Brokerage to distributors will not be charged under the Direct Plan

Minimum Amount For Application:

• Purchase: 5000/- and in multiple of 1/- after that
• Additional purchase: 1000/- and in multiple of 1/- after that

Redemption can be done for any amount or any number of units

Nomination Facility:

Investors should use for the nomination facility to avoid hassles or any problems in case of unprecedented events about to happen in the future. The nominee shall receive the Units only after the death of the owner

3. Nippon India ETF India Shariah BeES

Similar to the previous two schemes they also comply with the Shariah principles.

The aim of the Nippon India ETF Shariah BeES scheme is to provide returns that closely represent to the total returns of the Securities and companies as represented by the Nifty50 Shariah Index. They do so by investing in the same proportion as done in the index.

Minimum Investment:

• Through Stock exchanges:– 1  unit and then in it’s multiple
• With mutual funds:– In creation unit size viz 10,000units and it is multiple;

In accordance with its investment objective, Nippon India ETF Shariah BeES only invests in Securities or funds, which are represented in the Nifty50 Shariah Index.

However, Nippon India ETF Shariah BeES is not a Shariah-compliant scheme. In some regard, Nippon India has not appointed a Shariah board and currently does not follow any process for purification of the Shariah dividend.

What Is Shariah Law?

Shariah is the fundamental concept of Muslims, can be said as its law. It is looked upon as the god’s expression for Muslims i.e. how they should behave, and for that certain duties are to be followed by all the people believing the religion.

Ritual practices such as daily prayers, almsgiving, fasting, pilgrimage are the main constituents of Sharīah. They are ethical standards for Muslims on what one shall do and what one should refrain from doing.

What Does Investing Means as Per Shariah Law?

Shariah Law puts specific rules for Muslims on Investing:

• High risk: – Muslims are not permitted to gamble or do any sort of gambling where high risk is involved, and if anyone does so, this act is considered as a sin. In short, Muslims are not permitted to enter business with high risk or gamble your money.
• Restricted business: – Muslims are not allowed to carry or get involved in some specific business. These businesses include gambling, smoking, tobacco, and drugs. Even investing in companies manufacturing them is considered an immoral and sinful act.
• Ban On Payment of Interest: – According to Shariah Law, taking a loan against interest is considered unlawful, and it is considered unfair and unjust to pay interest. Solutions for this can be a partnership or ownership of a business to get funds.

Frequently Asked Questions(FAQs)

Bottom Line

The total AUM(Assets under Management) for all the three companies are very less as compared to the total market value of mutual funds and the total number of investor is also very less. In the future, multiple companies need to step upbringing in multiple schemes attracting people to invest in it.

Shariah-compliant mutual funds abide by all the rules mentioned in the Shariah Law. They do not invest in companies dealing with prohibited products. Earning interest and speculation is also not done by the fund providers. They are very good mutual funds, giving a good option for investing for Muslims without violating any religious laws