Shariah Compliant Mutual Funds: All You Need to Know About It

Mutual funds that comply with Shariah regulations and are intended for Islamic investors are known as Shariah-compliant mutual funds. These Islamic mutual funds don't invest in industries like gambling, alcohol, or traditional banking since they adhere to a strong code.

These funds, supervised by Shariah boards of academics and financial specialists, go through stringent screening procedures to guarantee adherence to Islamic law. Profit-and-loss sharing is a priority, and investments are concentrated on morally sound and interest-free securities. Mutual funds that adhere to Shariah provide a halal investment option in India for people looking to develop their money while upholding their moral and ethical principles.

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Who Can Invest in Shariah-compliant Mutual Funds?

• Investors who follow Islamic beliefs want their investments to align with Shariah law.
• Individuals seeking financial options that adhere to codes that follow Shariah law.
• Any investor who avoids investing in industries like alcohol, gambling, lending or enterprises with high debt.

Features Of Shariah – Compliant Mutual Funds

Here are key features of Shariah-compliant mutual funds:

Screening for Shariah Compliance:

Halal mutual funds adhere to a positive screening method. This involves choosing businesses in legal endeavours like technology, healthcare, and manufacturing.



Negative Screening:

To weed out assets linked to actions seen to violate Shariah law, these funds also use negative screening.



Shariah Board Oversight:

Islamic academics and financial professionals make up the special Shariah board or committee that oversees halal mutual funds in India that adhere to Islamic law.



Debt-Free Investing:

Mutual funds that adhere to Shariah usually steer clear of investing in companies with high levels of leverage and debt.



Profit-and-Loss Sharing:

Profit-and-loss sharing agreements are encouraged in Islamic banking. According to this idea, profit-sharing arrangements between businesses and Shariah-compliant mutual funds are permitted.



Asset-guaranteed Investments:

Shariah-compliant funds frequently concentrate on investments guaranteed by physical assets to reduce speculative components and promote transparency.



Purification procedure:

Shariah-compliant mutual funds undergo a purification procedure to guarantee continued compliance. This entails figuring out and deducting any investment income that isn't compliant. After being cleansed, the money is given to charitable organisations.



Investments in Sukuk:

Sukuk, or Islamic bonds, are a crucial part of halal mutual funds that adhere to Shariah.



Diversification Techniques:

To distribute risk over several markets and industries, mutual funds that adhere to Shariah regulations use diversification techniques.



Frequent Reporting and Audits:

Transparency is an essential component of finances that comply with Shariah. To ensure that Shariah principles are followed, audits are carried out regularly.

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Factors to Consider Before Investing in Shariah-Compliant Mutual Funds

Returns:

Compared to conventional funds, assess the prior performance of Shariah-compliant funds, including short-term and long-term returns.



Liquidity:

Assess the liquidity of the Shariah-compliant fund's assets to ensure you can purchase and sell units while staying on track with your investing objectives.



Limited Options:

Shariah-compliant funds may restrict specific sectors or industries, reducing investing opportunities compared to traditional funds.



High Costs:

Examine the cost structure, particularly management fees and expenses, as Shariah-compliant funds may incur somewhat higher costs due to increased compliance efforts.



Restrictive Decision-Making:

Recognise that fund managers of Shariah-compliant funds confront limits in their decision-making processes due to adhering to Islamic rules, which may influencefund performance.

Tax Treatment of Shariah-Compliant Mutual Funds

Standard Tax Regulations:

Shariah-compliant funds typically follow the same tax restrictions as traditional funds, with returns and gains subject to applicable legislation.


Consult With Tax Experts:

Investors should get tax guidance from experts to learn about the exact tax implications depending on their circumstances, which will help them optimise their tax status.

Also read: What Is Security Transaction Tax In Mutual Funds?

Comparison with Conventional Mutual Funds

1. Investment Option

Shariah-compliant funds follow Islamic principles by avoiding investments in sectors like alcohol, gambling, and non-compliant financial activity. This results in more constrained investing options, as mentioned earlier as well.
Conventional funds invest in diverse sectors and industries, including some that may not match ethical or religious convictions.

2. Risk and Return Profile:

Shariah-compliant funds seek to balance financial rewards and ethical issues. Shariah-compliant investments may have a different risk and return profile than conventional funds.
Conventional funds focus on financial results and may have varying risk exposures based on the industries and businesses represented.

3. Costs:

Shariah-compliant funds may have slightly higher fees due to additional efforts necessary to comply with Shariah standards. This could affect total expense ratios.
Conventional funds may have lower costs than Shariah-compliant funds due to fewer limits on investment choices.

4. Social Responsibility:

Shariah-compliant funds prioritise social responsibility by not investing in enterprises that do not adhere to Islamic values. These funds may appeal to investors looking for socially responsible investment opportunities.
Conventional funds may not overtly prioritise social responsibility unless stated in their investing mandate. Their main goal is financial performance.

5. Market Dynamics:

Industries that adhere to Shariah norms might influence Shariah-compliant funds' performance. The market dynamics influencing these sectors are considerable.
Market circumstances and economic considerations largely influence the performance of conventional funds.

Conclusion

Shariah-compliant mutual funds offer a socially responsible investment alternative for those who want to connect their financial choices with their religious convictions. Despite significant constraints, such as fewer investment alternatives and higher fees, these funds provide competitive returns and portfolio diversity.

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FAQs – Frequently Asked Questions