Many mutual funds undertake socially responsible investing – an investment strategy that seeks to consider financial returns as well as social values envisioned by different people. Of these, there is a subset that makes investments which adhere to the doctrines of Shariah or Islamic law. This may be of particular interest to a vast number of Muslim investors, who want to ensure that their investments are in accordance with Islam’s moral code. So to help you understand these opportunities better, let’s have a look at the features of Shariah-compliant mutual funds and the different available funds, which meet these requirements.

What are the features of Shariah-compliant mutual funds?

Muslim investors, who wish to respect and uphold their beliefs while looking for opportunities in the market, have to make certain considerations. Under Shariah, there are certain types of products and funds that a Muslim is not permitted to invest in. So for a fund to be Shariah-compliant, these are the characteristics it must embody:

1. The fund must not invest in companies that generate a majority of their income by selling alcohol, pork, tobacco, weapons and other military equipment, or are involved in illicit activities like gambling, pornography and so on.
2. As per Shariah, all forms of interest (Riba) are prohibited. So a Shariah board is appointed to ensure that income made on interest is avoided, by distributing it to charity. Furthermore, since it may be impossible to avoid interest income completely, funds are allowed to invest in companies where this is no more than 3% of their total income. 
3. They must avoid taking immoderate levels of risk and investing in fixed income instruments. In line with this, derivatives and companies with high debts are usually not included. Funds cannot invest in companies where the total debt is greater than 25% of its total assets.

What are the Shariah-compliant mutual funds available currently?

The S&P CNX 500 Shariah and the S&P CNX Nifty Shariah are two indices which were launched in 2010 to help guide Muslim investors on purchasing Shariah-compliant stocks. Currently, there are 3 mutual funds in India which are Shariah-compliant –

1. Tata Ethical Fund: This fund is suitable for investors who are looking for long term capital accumulation without exposure to banking and finance. It is a diversified fund which invests in equity and equity-related instruments of Shariah-compliant companies. 
2. Taurus Ethical Fund: This fund is similar to the Tata Ethical fund and is recommended to investors who are looking for a diversified fund to accumulate capital in the long term. It too invests in equity and equity-related instruments of Shariah-compliant companies. 
3. Nippon India ETF Shariah BEes: This fund is recommended to investors who want to make medium to long term accumulations of capital. It invests in securities from the Nifty50 Shariah index, in proportions that are comparable to the index. However, since it is an exchange-traded fund (ETF), you will need to have a Demat account to invest in it.

Shariah-compliant mutual funds are not just meant for Muslim investors, but for anybody who shares these principles while investing. So if you’re thinking about investing in Shariah-compliant funds as a socially responsible investment strategy, talk to your financial advisor and figure out how you can get started.