According to our experts who design the Shariah Investing app: There are various types of mutual funds that adhere to socially responsible investing. Shariah Compliant Mutual Funds are a sort of socially responsible investing that is based on the Muslim religion’s Shariah or Shariat law. These mutual funds follow Shariah law, which is an Islamic moral code.
Here are some characteristics and essential tips about Shariah Compliant Mutual Funds that may help you to opt for Shariah Investing with the Shariah Investing app.
Shariah-Compliant Mutual funds have Certain Characteristics
A Muslim is prohibited from investing in any type of funds under Islamic law. There are some limitations to the type of investment they can make. In the Shariah Investing app, Shariah Compliant Mutual Funds are those that invest under the Islamic legal framework.
These funds have the following fundamental characteristics:
1. Muslims are prohibited from investing in anything that could hurt other people (physically or emotionally) or the environment, including companies that promote weaponry.
As a result, these funds prohibit investments in companies that make a significant amount of their revenue from the sale of alcoholic beverages, cigarettes, pork, weapons, and other military equipment, gambling, and pornography.
2. Muslims are supposed to refrain from pursuing interests or engaging in Riba. According to the Quran, anyone who engages in this is waging war against God. This is why Muslims are not permitted to invest in companies that overtly trade in Riba or interest. As a result, these funds are forbidden from holding any form of interest. A Shariah board that has been appointed avoids such prohibited sources of income by donating it to charity.
3. These funds tend to avoid taking excessive risks. Derivatives and enterprises with significant debt levels are excluded from the analysis.
4. These funds do not invest in fixed-income securities.
5. These funds are not limited to Muslims; investors of all faiths are welcome to participate.
Restrictions According to Shariah Law
Aside from the unique characteristics, a fund must adhere to specific standards in order to be labeled as a Shariah Compliant Mutual Fund here the Shariah Investing app helps.
The ratio of total debt to total assets
This fund is unable to invest in companies whose total debt exceeds one-fourth of their total assets.
Companies that do not charge interest
Because it is impossible to identify a firm that generates 100% interest-free income, this fund is designed to invest in companies with interest income of up to 3% of total income.
Business with Restrictions
This fund is unable to purchase stock in companies that provide financial services, such as banks and insurance companies, as well as companies that make booze, pork, tobacco, or engage in gambling, nightclub activities, pornography, and other similar activities.
Mutual Funds That Are Shariah-Compliant in India
In India, the S&P was the first to introduce Shariah indices in 2010. The following two indices were created for Shariah Compliant Mutual Funds:
- S&P CNX 500 Shariah
- S&P CNX Nifty Shariah
In India, there are now two popular Shariah Compliant Mutual Funds. The following are some of them:
Tata Ethical Fund- A non-profit organization founded by Tata Sons
The Tata Ethical Fund is designed for investors who want to invest in a diversified equity fund that is free of banking and finance risks. It is appropriate for investors seeking long-term capital growth and who want to invest in Shariah-compliant firms’ equities and equity-related products.
Taurus Ethical Fund
Taurus Ethical Fund is also for Shariah-compliant investors who want to invest in equities and equity-related products. It is appropriate for investors seeking long-term financial appreciation while adhering to Islamic investment guidelines.
Conclusion
Shariah Compliant Mutual Funds are funds for investors who want to invest in a way that is socially responsible. Due to the constraints imposed by Shariah law on investments, funds must adhere to the same and hence have a narrowly defined investment focus. As a result, the return is influenced by the Shariah-compliant sector’s overall performance. As a result, after considering all of the advantages, an investor should consider investing in Shariah Compliant Mutual Funds with the help of the Shariah Investing app.
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