Shariah-compliant Mutual Funds

There are several mutual fund categories that offer socially responsible and religious investing. Shariah-compliant mutual funds are among the options, and these align with the tenets of Sharia law in the Islamic religion.

Shariah-compliant mutual funds are a type of investment fund that follows the principles of Sharia law. These funds avoid investing in assists considered prohibited or haram under this law. 

 

These funds function similarly to traditional funds, with investors pooling money together. A fund manager then selects Shariah-Compliant securities, manages the investment portfolio, and monitors the performance of the mutual fund scheme. 

 

The fund typically gets diversified across various companies and sectors to reduce the risk associated with investments.

Here are the principles that Shariah-compliant mutual funds abide by.

• Prohibition of Interest

Islamic law strictly prohibits receiving or paying interest, and that is why investing in companies that generate interest income or pay interest is not allowed. Nevertheless, since most of the companies have some involvement with interest, certain restrictions are there on interest income and debt levels. Investments are limited to companies that adhere to these criteria.

• Prohibited Industries and Businesses

Principles under the Sharia law prohibit investing in companies that primarily derive their income from activities like: 

1. Pork products

2. Tobacco

3. The sale of alcohol

4. Gambling

5. Drugs

6. Nightclub operations

7. Weapons
    

Shariah-compliant mutual funds focus on investing in industries and businesses that have a positive social impact and maintain ethical practices.

Check out some of the advantages associated with investing in Shariah-compliant mutual funds.

• Ethical Investing

These mutual funds adhere to ethical and socially responsible principles of investing. These mutual funds work by opting for companies and industries that align with Islamic values and principles. They avoid dealing with companies and industries that are prohibited or haram under the Islamic religion. 

• Diversification of Portfolio

Diversify your portfolio across various industries and companies that work ethically. This diversification spreads the risk and helps safeguard your investments against potential losses in specific companies or industries. 

 

As a result, you can enjoy a stable and balanced portfolio that can deal with market fluctuations effectively. 

• Growth Opportunities

Shariah-compliant mutual funds offer promising growth opportunities by seeking out ethical industries and companies that have strong growth potential. When you make investments in such companies, you stand a chance to benefit from capital appreciation when the value of securities increases. 

• Professional Fund Management

Professional fund managers are responsible for managing Shariah-compliant mutual funds who possess a deep understanding of the finance industries as well as Islamic principles. These skilled fund managers research and choose Shariah-Compliant companies and sectors to invest in. Then, they manage and monitor the investments and help you get maximum returns on your investments.

• Transparent Investment Approach

Transparency is an essential aspect of Shariah-compliant mutual funds. You can invest in mutual funds hassle-free, knowing that these funds maintain clear communication regarding their holdings and investment approach. 

 

You get regular performance reports and updates through the fund managers, which help you understand how and where your money is getting invested.

Shariah-compliant mutual funds are also associated with some disadvantages. They are -

• Limited Options

Due to the restrictions imposed by Islamic law on certain industries and companies, these funds may offer a limited section of investment options. 

• Higher Investment Cost

Another disadvantage of Shariah-compliant mutual funds is that these mutual funds are associated with higher fees and charges. This is due to the rigorous process of ensuring adherence to Sharia law, and this contributes to the enhanced overall cost of management of the mutual fund.

 

These funds offer a suitable investment avenue if you are seeking alignment with Islamic principles. These investments can help combine ethical investing with growth and diversification. 

 

Remember to diligently assess the performance and objectives of the fund to check if they align with your investment goals and risk tolerance.