With the view of catering to mutual funds for individuals who follow the Shariat or Shariah law, mutual fund houses have launched Shariah-compliant mutual fund schemes. These funds strictly adhere to the norms of the Shariah law, which Muslims widely follow. We have covered the following in this article:
Table of Contents
Brief Introduction to Shariah Law
Shariah law is also referred to as the Muslim moral code. It is a religious law and restrictions that are self-imposed by those who strictly follow the Islam religion. The law is derived from the Quran, the holy book of Islam and the Hadith. Numerous countries around the globe have implemented Shariah law in their legal system.
Shariah Law and Finances
It is a known fact that most Muslims don’t accept interest payments. Strict followers of the Quran, the Hadith and Shariah laws do not like to benefit from lending their money, receiving interest payments. Irrespective of individuals or banks, earnings in the form of interest are not permissible under Muslim laws.
Shariah law allows investing in the shares of only those companies that do not indulge in the activities disallowed by Islamic laws. This includes lending money with the view of earning interest, production of alcoholic drinks, pork and speculation.
Shariah Compliant Mutual Funds
Shariah-compliance mutual funds are those fund schemes that strictly adhere to the laws laid down by the Quran, the Hadith and Shariah law. These funds do not invest in companies involved in activities that are not permitted under the Muslim ethical code.
Features of Shariah Compliant Mutual Funds
The following are the most important features of Shariah-compliant mutual funds:
- The underlying companies of a Shariah-compliant mutual fund are not involved in activities that may directly or indirectly harm people and the environment. The underlying companies are forbidden from producing alcoholic and tobacco products and weapons. The companies are also not allowed to involve in processing pork.
- As Muslims do not accept interest payments or Riba, the Shariah-compliant companies do not invest in companies that generate a significant part of their revenues in the form of interest income. These mutual funds do not generate interest. Any interest generated by a Shariah-compliant mutual fund is donated to charitable trusts.
- A Shariah-compliant mutual fund avoids taking higher levels of risk. The fund manager generally excludes companies and derivatives that possess a high debt.
- As the interest payments are not allowed, a Shariah-compliant fund may not invest heavily in fixed-income generating securities.
- Individuals from all religions are welcome to invest in a Shariah-compliant fund as it is not restricted to only Muslims.
- Investments in Shariah-compliant fund can be made through SIP or lumpsum mode.
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Conclusion
Shariah-compliant mutual fund schemes are suitable for those who like to follow Islamic laws with their investments strictly. Mutual fund houses cater to every individual’s need, and the existence of Shariah-compliant mutual funds proves it.
