What is Shariah Investing?
It's an investment process whereby investors aim to invest in a socially responsibly manner adhering to shariah guidelines and achieve adequate returns to beat inflation.
Over 40% of listed companies on the BSE and NSE are Shariah compliant.
Shariah-compliant stocks have historically performed in line with conventional stocks.
Screening Process for companies to be called as Shariah Compliant:
- Business Screening :
Businesses should not be involved in haram (forbidden) activities such as alcohol, gambling, pornography, conventional banking (with interest-based products), weapons manufacturing, Music related, Pornography related and others that are explicitly prohibited in Islam.
- Financial Screening:
- 1. Interest-Bearing Debt:
Companies are evaluated based on the proportion of their debt that is interest-bearing. Typically, such debt should not exceed 33% of the company’s total assets or market capitalization. This screening aims to minimize involvement in riba (interest), which is prohibited in Islam. Most methodologies, including the Dow Jones Islamic Index, MSCI, and S&P Shariah Index.
- 2. Impermissible Income:
This refers to income generated from activities that are not Shariah-compliant, such as alcohol, gambling, or conventional financial services. Companies should have no more than 5% of their total revenue from such impermissible activities. If any impermissible income is identified, it must be "purified" through a process that usually involves donating the income to charity.
- 3. Cash and Interest-Bearing Securities:
Similarly, the allowable ratio for cash and interest-bearing securities is also set at 33% of total assets or market capitalization across major screening methodologies such as those by FTSE, AAOIFI, and others. This aims to restrict companies from generating significant income through interest-based instruments.
- 4. Accounts Receivable:
Companies must also maintain an acceptable ratio of accounts receivable, generally no more than 45% of total assets, to avoid excessive reliance on credit sales. This screening applies to indices such as S&P Shariah and MSCI.
- 1. Interest-Bearing Debt:
Shariah board certified Ethical Mutual Funds
Shariah-compliant mutual funds are governed by the requirements of Shariah law and the principles of the Islamic religion. These funds are considered to be a type of socially responsible investing. There are three Sharia-compliant mutual funds in India—Tata Ethical, Taurus Ethical and Quant Ethical fund.
Tata Ethical Fund is an open-ended equity fund which invests in a diversified equity portfolio based on principles of Shariah. The investment objective of the scheme is to provide medium to long-term capital gains by investing in Shariah compliant equity and equity-related instruments of well-researched value and growth-oriented companies.
Taurus Ethical Fund is an open-ended equity scheme with investment in stocks from S&P BSE 500 Shariah Index universe. The investment objective of the scheme is to provide capital appreciation and income distribution to unit holders through investment in a diversified portfolio of equities, which are based on the principles of Shariah.
Quant Ethical Fund: The Quantum Ethical Fund is an open-ended Equity Fund that invests in companies meeting an Ethical Set of Principles with the objective of achieving long-term capital appreciation. The proprietary screening framework ensures that every portfolio investment stands high on Ethical & Integrity parameters. With Quantum Ethical Fund, an investor can invest responsibly, where moral principles and prosperity work together for a brighter future.
Alternatively, you can also invest directly into the constituent stocks of Shariah Indices of NSE & BSE. You need to have a demat cum trading account to be able to invest into an ETF and stocks.
