In the recent past, I have had queries about the various options which are available for investing in mutual funds in India, based on the principles of Shariah. But, for the beginners, before knowing about such mutual funds, it is important to know what Shariah is;
What is Shariah ?
Shariah (or the Islamic Law) is defined as a body of divine laws, rules, code of conduct and teachings which are intended to benefit the individual and society. It refers to the Islamic canonical law based on the teachings of the Koran. This law imposes certain strictures on the types of financial and commercial activities that Muslims can engage in. While trade and investment are encouraged, Shariah investing rules prohibit involvement in businesses related to certain haram (prohibited) activities.
What is a Shariah complaint mutual fund ?
Shariah-compliant mutual funds are investment vehicles just like any other mutual fund, but they are fully compliant with the principles of Shariah law. In order to comply with Shariah, the mutual fund scheme should invest only in a Shariah compliant company.A Shariah compliant company, must therefore meet certain criteria based on qualitative and quantitative parameters. Looking at the qualitative parameters first, the company should not engage into activities related to conventional banking and insurance, gambling, pornography, human abortion and cloning, production or trade of non-halal (prohibited) goods, such as alcohol and pork. With many companies having a diversified array of businesses, it becomes difficult to find companies who don’t engage in any of these activities, specially it is difficult to find a company having no interest income. Hence additional criteria are looked into in the case of companies engaging in a mix of activities. First, the public perception of the company is looked into, which ought to be meritorious. Second, the core activity into which the company is engaged must be in public interest, with prohibited elements forming a negligible part of their activity.
The quantitative parameters on the other hand ensure that the non halal (prohibited) activities of the company do not exceed the permissible limit. For example, the total debt to total assets ratio should not exceed 33%, the non-operating interest income to revenue should not exceed 5%. However, if a company is engaged in a considerable amount of non-halal (prohibited) activity, it can purify their profits by donating a percentage of their income to a charitable organisation, before the distribution of dividends to shareholders.
Shariah compliant investment options in India
Unlike the West, there are not many Islamic Investment opportunities available in India. However, two leading fund houses have launched Shariah compliant Mutual Fund Schemes to cater to the needs of all those who are willing to taste the equity markets without breaking the Islamic laws.
1. Shariah BeES by Benchmark Mutual Fund : It is an open ended scheme which was launched in March 2009. It is a passively managed fund that invests in securities that constitute the S&P CNX Nifty Shariah Index in the exact proportion as in the index. It is having a significant exposure in companies operating mainly in the sectors of energy, technology, metals, healthcare, automobile, engineering, construction, communication and FMCG. The scheme seeks to generate returns that closely correspond to the total returns of the securities as represented by the S&P CNX Nifty Shariah Index by investing a minimum 90% of its assets in securities which are constituents of S&P CNX Nifty Shariah Index in the same proportion as in the Index. 98.89% of the total assets of the fund are allocated towards equity and the remaining 1.11% are also not allocated towards debt, thus eliminating the risk of any interest income accruing directly to the mutual fund. It has given a decent return of 10.41% p.a. and a whooping return of 45.10% since its launch. A minimum amount of Rs. 10,000 is required to start investing in this fund and no facility of SIP (Systematic Investment Plan) is available. Currently, it is managing assets worth Rs. 9o lakhs.
2. Taurus Ethical Fund by Taurus Mutual Fund : It is an actively managed diversified equity fund launched in March 2009. Taurus Ethical Fund invests in the stocks of those companies which are a part of the S&P CNX 500 Shariah Index. The sectors in which the funds are invested, are the similar to those of Shariah BeES. However, stocks of companies in the mid cap space are preferred more here. Also, 91.07% of the total assets are allocated towards equity and the remaining, in areas other than debt. As the fund is actively managed, it has outperformed its category and has generated a return of 23.79% p.a. as compared to its category return of 20.01%. Also, it has grown by leaps and bounds and given a return of 66.15% since its launch. A minimum investment of Rs. 5,000 is required for this fund and an SIP can also be started with a minimum amount of Rs. 1,000. Its assets under management have seen a drastic increase and now stand at Rs. 25.40 crores.
Who can invest in these funds ?Though the funds are constituted and managed on the principles of Shariah, investment in these funds is open to any individual irrespective of his religion. NRIs, HUFs, companies and other institutions are also free to invest in these funds.
Is there any tax benefit for investing in Ethical/Shariah compliant Mutual Funds ?No, currently investments in none of these funds qualify for the tax benefits which are available under section 80C of the Income Tax Act.
I have tried my best to cover all the aspects related to Shariah compliant mutual funds in India. If you find any other information or fund belonging to this category, which is not included above, then please share your thoughts here. Also, if you have anything to say, don’t forget to leave a comment. You feedback would be highly appreciated.
UPDATE (27/12/2010) : The Bombay Stock Exchange along with Taqwaa Advisory and Shariah Investment Solutions (TASIS) launched a Shariah compliant index on 27/12/2010. The BSE TASIS Shariah 50 Index includes some of India's leading companies like Reliance Industries, Bharti Airtel, Tata Teleservices etc. This is an answer to rival NSE's Shariah Index. This development by BSE will provide more opportunities to the entities interested in launching Shariah compliant ETF's and Mutual Funds in India.
Disclaimer : All the statistics provided above have been sourced from Value Research and updated till 23/12/2010.
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