Investing in Ethical Mutual Funds - Shariah Compliant Funds

shariah

Ethical funds are funds that refrain from investing in vice industries. They were launched to help investors invest while maintaining a clear conscience. Although ethical funds are just socially responsible funds, the Shariah funds are known for investing according to the Islamic finance principles and ethics (Shariah rules).

Some of the Shariah compliant funds in India are – Goldman Sachs CNX Nifty Shariah BeES Fund, Tata Ethical fund and Taurus Ethical fund. Since shariah funds are limited in India, some investors choose thematic funds which invest in areas considered as halal, although they do not state to be shariah complaint themselves.

Though shariah funds have their own restrictions, they have performed as well as other funds since they invest in well run companies and big exporters like pharmaceuticals and auto firms.

What are the sectors shariah funds exclude on?

Shariah compliant funds exclude from investing in funds that derive its major income from the following industries:

Alcohol, tobacco, pornography, gambling, pork manufacturing, and businesses that lend money with interest (includes traditional banks and financial companies), weapons and military equipment etc.

Performance of shariah compliant funds:

Historically, shariah funds have performed as well as other funds. This can be contributed to the fact that these funds invest in selective, but well performing companies and exporters. Because of their ethical values, the shariah funds also attract Jain investors in addition to Islamic investors. Although the Jain community is small, it is quite influential with a large number of securities traders.

In the following charts, I have compared the NAV values of a shariah compliant fund (Tata ethical fund) and a non shariah fund that has performed well for the past five years (L&T India large cup fund). Although the two funds have different NAV rates, the growth of the two funds has been almost parallel proving that the shariah rules do not restrict from funds from performing well.


Some of the Shariah compliant funds in India are – Goldman Sachs CNX Nifty Shariah BeES Fund, Tata Ethical fund and Taurus Ethical fund. Since shariah funds are limited in India, some investors choose thematic funds which invest in areas considered as halal, although they do not state to be shariah complaint themselves.

Though shariah funds have their own restrictions, they have performed as well as other funds since they invest in well run companies and big exporters like pharmaceuticals and auto firms.



In the below chart, I have computed the annual returns of two ethical funds( in blue) and two non-ethical funds(in green) for better clarification from the years 2013 to 2017. While the two types of funds have faced their own bulls and bears, the return percentages have been significant.

Bottom-line:

Since shariah funds have fared well historically, shariah compliant funds are a good choice for investors who are looking to be more socially responsible. As long as the AMCs promote these funds diligently, they will continue being successful. Although they do not invest in the banking space, which is the backbone of the economy, these funds have managed to maintain their consistency over the long run and outperform many other funds. Shariah funds invest mainly in infrastructure and pharmaceutical industries, both of which have a good potential in future. Hence, investors who invest in these have a good chance of reaping a good return. 

 

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Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing. Past performance is not indicative of future returns. Please consider your specific investment requirements before choosing a fund, or designing a portfolio that suits your needs.