What are Shariah-Compliant Mutual Funds?

Before we get into the details of Shariah-compliant mutual funds or investments in specific, 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 is investing as per the Shariah Law?

The Shariah Law mentions some restrictions with regard to businesses that an individual pursues. Some of these restrictions are as follows:

High Risk: One of the principles of Islamic law is to avoid gambling. Gambling as per Islamic law is considered a sin. Going by this logic, individuals following Islamic law are restricted from entering into any business that has high risk as that is equivalent to gambling.
Ban on payment of Interest: Taking a loan against interest is considered unlawful. It is deemed morally unjust and unfair to pay interest. This is one of the primary reasons that business tends to rely on partnerships and ownership. They tend to share profits (and losses) rather than borrowing or lending.
Restricted Businesses: One of the most important aspects with regard to investments as per Shariah law is the restriction from investing in certain types of businesses. Businesses such as gambling, alcohol, tobacco, and drugs are considered immoral.

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Which Shariah Compliant Mutual Funds are available in India?

Some of the Shariah-compliant mutual funds available in India are as follows:

1. Tata Ethical Fund- Currently, this fund has around 57% of its investment in large-cap companies and 42% in mid and small-cap companies. It has given a return of 11.61% over the previous 5-year period as of 27 January 2021.

2. Taurus Ethical Fund- Currently, this fund has half of its assets invested in large-cap companies and the rest of its assets in small-cap and mid-cap companies. It has given a return of 13.03% over the previous 5-year period as of 27 January 2021.

3. Nippon India ETF Shariah Bees- This scheme invests at least 90% of its assets in equity securities which are the constituents of the CNX Nifty Shariah index and have the same allocation of assets as the index. It has given a return of 15.76% over the previous 5-year period as of 27 January 2021.

Both these funds invest in equities across categories, with the restrictions of the Shariah Law. Other than these, investing in gold is considered as Shariah-compliant. 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.

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Who can Invest in Halal Shariah-compliant Mutual Funds?

Even though the investments done by a Shariah-compliant 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. 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.

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.

What is the benchmark?

Some of the benchmark indices are:

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

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.

Q. What is the Shariah Law?

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

One of the principles of 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, drugs as these are considered immoral.

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,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:

Tata Ethical Fund
Taurus Ethical Fund
Nippon India ETF Shariah Bees

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