The ethical investment alternatives, which are demanded in the Indian financial market, have increased tremendously. Faith-based investment solutions are gaining popularity among Muslim investors and other investors, who are interested in socially responsible investment. Such mutual funds follow the Shariah law which is an Islamic moral code. The market of shariah funds in india has been able to grow to suit the increased demands of investors who wish their investments to comply with the Islamic doctrine.
Fundamentals of Shariah Compliant Investment Framework.
Shariah-compliant investments are based on the basic Islamic finance principles that actually put them apart with the conventional investment facilities. These funds are guided by the concept of Islamic finance in that they do not make any interest-based investments and companies that deal with alcohol, gambling, or pork are not permitted. The major limitations are not to engage in riba (interest), gharar (excessive precariousness), and haram (prohibited) practices.
These values make sure that the revenue of the Halal investments like Halal shares should not include riba (interest), gharar (undue uncertainty) and Haram investments such as gambling, alcohol, and traditional banking. Strict screening of companies in which they invest is undertaken to ensure they observe these ethical guidelines by the portfolio companies.
Shariah Funds that are available in the Indian Market.
The Indian mutual fund sector provides various alternatives to investors who want to make investments that are Islamic-compliant. Tata Ethical Fund, Taurus Ethical Fund, Quantum Ethical Fund, and Nippon India ETF ShariahBeEs are compliant. The funds are the major shariah compliant investments that are offered to the Indian investors.
Although it was once called ESG investing, Quantum Ethical Fund has now clearly described itself as a Shariah-compliant mutual fund, the combination of Islamic ethics, environmental responsibility, and social responsibility. This demonstrates how fund houses are considering the needs of certain investors and tailoring their services to their needs.
Investment Criteria and Methodology of the Screening.
Shariah-compliant funds adhere to certain financial ratios and screening criteria to identify the investment. It may not be possible to come across a company whose income is 100 per cent interest-free. Thus, the Shariah Compliant Mutual Funds invest in companies that have interest income of 3 per cent of the total income. Fund managers also make sure that total debt does not surpass 25 per cent of total assets of companies.
There are qualitative and quantitative filters that are used during the screening process. Firms with outlawed business practices have been left out altogether and those with low exposure to the outlawed revenue streams may be accommodated, provided that they satisfy certain requirements.
Investment and Consideration of market performance.
The Shariah-compliant funds have some limitations as compared to conventional investments. The Shariah-compliant funds are guided by Islamic guidelines as they do not make investments in areas such as alcohol, gambling, and non-compliant financial activity. This leads to restricted investment options as opposed to the traditional funds which are able to invest in any sector.
Irrespective of these restrictions, these funds offer diversification to the investors in compliant companies operating in different sectors. The emphasis on ethical corporate business and debt restriction has the potential to mitigate some of the investment risks, but can also restrict expansion opportunities in a few market environments.
Conclusion
The Shariah-compliant environment in India is still in its building phase because of the increasing number of investors in search of ethical investment options. Investors can now get professionally managed Islamic finance products as the Tata Ethical Fund and the Quantum Ethical Fund are already the top players in the field. They cater to the needs of Muslim investors interested in using their financial objectives in line with their religious beliefs as well as other investors who might be interested in socially responsible types of investments.
Emily Williams