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Business News/ Money / Personal Finance/  Here’s why there is a rising interest in Shariah funds
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Here’s why there is a rising interest in Shariah funds

These funds primarily cater to investors who abide by Shariah laws, which lay out the guidelines on sectors and companies that are Shariah-compliant.

Shariah-compliant funds have been present in asset management through mutual funds (MF) and portfolio management services (PMS) in India. (Photo: istock)Premium
Shariah-compliant funds have been present in asset management through mutual funds (MF) and portfolio management services (PMS) in India. (Photo: istock)

Shariah-compliant funds have been present in asset management through mutual funds (MF) and portfolio management services (PMS) in India. These funds primarily cater to investors who abide by Shariah laws, which lay out the guidelines on sectors and companies that are Shariah-compliant. The Islamic community had refrained from investing in the equity markets primarily because the income earned would not be halal (permissible). An investment may not be considered Shariah-compliant if it fails to meet the requirements of Shariah laws.

However, with increasing awareness among experts from the community and fund houses, this trend has been changing, and more and more investors have gradually started participating in the market. One can invest in these funds through the PMS or MF route. The rules and norms for Shariah-compliant investing in the stock market are divided into the following three sections:

(i) Business and industry screening parameters for Shariah-compliant companies; (ii) Financial screening parameters for Shariah-compliant companies; and (iii) Purging of impure (interest) income for investment in Shariah-compliant companies.

 

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Companies involved in the business of alcohol, tobacco, gambling, gold and silver trading, banking and financials, pork and non-vegetarian, advertising, media and entertainment are excluded. These industries may not fall within the parameters of ethical investing for some communities and would not be suitable investments for observant community investors. Some basic financial screening parameters that are carried out to filter stocks in addition to the sectors mentioned above are: a) Total debt to total assets of the company should be less than or equal to 25%; b) Total interest income to total assets of the company should be less than or equal to 3%; c) Receivables and cash balances to total assets of the company should be less than 90%.

Therefore, there will be instances where companies are operating in Shariah-compliant industries but do not meet the requirements, according to the financial screening parameters.

A very small section of the Jain community also maintains strict parameters when it comes to investing in sinful industries, and this fund selectively caters to their needs as well.

Fund houses seek the services of advisory from Shariah Scholars for a list of Shariah-compliant stocks to invest in, and then handpick stocks from the list.This service of availing Shariah advisory by asset managers is availed through reputed organizations. Whenever a stock fails to comply with Shariah standards , fund houses sell the stock from clients’ accounts.

The example below illustrates a simple screening process by fund houses, to curate portfolios as per their fund management styles: a) Out of the listed stocks on Indian exchanges, Shariah-compliant stocks are picked as per various parameters; and b) Based on this, they follow their own portfolio management style to pick stocks.

Shariah Funds are benchmarked against the NiftyShariah 500 Index, which is heavily inclined towards companies from information technology, fast-moving consumer goods, consumer durables, healthcare, and automobile industries. Therefore, the index composition would look different from that of NSE 500.

Similarly, certain asset managers offer exchange traded funds based on the Nifty50 Shariah Index, for retail investors. As of 26 May, the NiftyShariah 500 outperformed the Nifty50 and Nifty 500 over a 10-year period, considering point-to-point returns.

Further awareness about these funds, and a shift in mindset could make this an attractive market for those investors who have been staying away from the equity markets.

Ankush Datar is associate vice president- PMS at Phillip Capital India.

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Published: 31 May 2023, 10:41 PM IST
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