All You Need To Know About Shariah Investing

Shariah Investing is an investment approach that follows financial principles derived from “Shariah”. It excludes investments involving interest, gambling, and certain business activities prohibited as per “Shariah” principles.

Before we begin analyzing Shariah Investing, let's first understand what Shariah is.

Shariah, broadly translated as 'clear path' or 'way to the original source', governs the day-to-day life of people following Islamic tradition, including financial activities like investing.

Shariah investing is investing in compliance with the set goals and values under Shariah.

The Islamic tradition governs that you must be ethically and socially responsible while investing your money. It means that your investments not only benefit you but also contribute to the overall development of society.

Under Shariah investing, you must comply with a set of principles.

Let's take a look at these principles.

• Prohibition of Interest

  Interest is prohibited under Shariah. You are not allowed to either pay or receive interest as it is considered unjust. For example, a bank following Shariah cannot give interest-based home loan to you. Instead, the bank will purchase the house and rent it to you, and you are required to pay rent to the bank. This rental income received by the bank will further be distributed among the depositors of the bank as a way of sharing profits.
   

• Prohibition to Invest in Certain Businesses

  Shariah prohibits you from investing in businesses that earn their income through the sale of alcohol, abusive drugs, pork products, gambling, weapons, and other such products. You are also forbidden to invest in companies that earn most of their income, like interest from others.
   

• Balanced Distribution of Wealth

  As per Shariah, you must pay a certain percentage of your wealth as an act of charity. If we compare it with Tax, it is somewhat similar in the sense that you must share your wealth with others who are less fortunate. It is considered to cleanse and purify the remainder of your wealth.

   

  In addition to the above three points, Shariah also governs both risks and returns associated with any financial transaction that must be shared between both parties. No one party must be the only beneficiary.

   

Following the Shariah principle, you can invest in stocks or mutual funds. However, it can be challenging to select Shariah-compliant stocks. In that case, investing in a Shariah based mutual fund can help. There are Shariah-compliant mutual funds available in India. These funds invest your money in socially responsible businesses based on the principles of Shariah. With a focused investment objective guided by Shariah, these mutual funds can provide capital appreciation, diversification and income distribution. These mutual funds have Shariah indices as their benchmark. An investor should consider the fund details available in the Key Information Memorandum (KIM) and the Scheme Information Document (SID) before investing in Shariah-compliant funds. This can help you know the risk profile, asset allocation, past performance, and other details about the fund.

1. What are Shariah funds?

Shariah funds are mutual fund schemes that follow Shariah principles while selecting investments. As per general market understanding, they avoid businesses involved in activities such as alcohol, gambling, pork products, weapons, and interest-based financial activities. 

These funds invests in businesses that meet “Shariah-compliance” criteria, subject to the scheme’s stated investment objective.

2. How to invest in Shariah-compliant funds?

Investors may explore Shariah-compliant mutual funds through AMC websites or registered intermediaries. Before investing, you should review scheme related documents [such as the Scheme Information Document (SID) and Key Information Memorandum (KIM)] to check the stated investment objective and asset allocation.

3. What are the major principles of Shariah investing?

Shariah investing is generally  based on the following major principles:

• Prohibition of interest (Riba)
• Restrictions on investment in certain businesses (such as those related to alcohol, tobacco, pork, and gambling)
• All transactions should be supported by tangible assets or real economic activity 

Additionally, financial transactions should also involve an appropriate sharing of “risk + returns” between the parties rather than allowing one party to be the sole beneficiary.

4. Which businesses are avoided in Shariah investing?

Generally, investments are restricted in companies whose income or business activities do not meet prescribed “Shariah-compliance” criteria, such as alcohol, gambling, pork products, abusive drugs, and weapons.

An Investor Education and Awareness Initiative by Tata Mutual Fund. 

To know more about KYC documentation requirements and procedure for change of address, phone number, bank details, etc., please visit: https://www.tatamutualfund.com/deshkarenivesh 

Please deal only with registered Mutual Funds, details of which can be verified on the SEBI website under ‘Intermediaries / Market infrastructure institutions.’

All complaints regarding Tata Mutual Fund may be directed to service@tataamc.com and/or https://scores.sebi.gov.in/ (SEBI SCORES portal) and/or https://smartodr.in/login 

Nomination is advisable for all folios opened by an individual, especially with sole holding, as it facilitates an easy transmission process. 

This communication is a part of the investor education and awareness initiative of Tata Mutual Fund.