Shariah fund: good investment option

by khalid on 11/05/2009 · 0 comments



Introduced recently in India, primarily with the objective to attract the Muslim investor community, Shariah funds comply with the principles of Quran in investing. They typically screen out high-debt companies and those engaged in businesses prohibited by Islamic law.

But if you thought that this would inhibit these funds from returning well, sample this. The Nifty Shariah index has reported a 27 per cent return this year, higher than the benchmark index Nifty’s 22 per cent! Shariah BeES, an ETF that listed in NSE on April 1, 2009 has turned a 19 per cent return till date, higher than the Nifty’s 18 per cent.

The Islamic law Shariah forbids making money through certain business activities, which include lending of money for interest, advertising and gambling. Investing in companies that sell alcohol, tobacco and pork is also not permissible.It is to address this specific need of investors that some Asset Management Companies came out with products and funds that invest only in companies that abide by the Islamic law.

Currently, there are two such Shariah-compliant mutual funds — Shariah BeES and Taurus Ethical fund. Though both the funds do not come with any assured returns tag, they promise capital appreciation by investment in equities based on the principles of Shariah.

As a principle again, Shariah funds keep away from companies high on debt and those that see chunks of interest income. The Taurus Ethical Fund, for instance, has three filters for stocks:Debt should not exceed 25 per cent of total assets.Interest income should not exceed 3 per cent of total income.Cash and receivables should not exceed 90 per cent of total assets.

Similar to the many sectoral indices in our bourses, there also are Shariah indices — S&P CNX Nifty Shariah (derived from S&P CNX Nifty) and S&P CNX 500 Shariah index (derived from S&P CNX 500).

These indices include only those constituents of the underlying index that pass the Shariah screening test. For instance, while the Nifty Shariah index has 38 companies of the Nifty-50, the CNX 500 Shariah index has only 211 companies of the total 500 in the broader index.

The top companies, by weight, in both CNX 500 Shariah and CNX Nifty Shariah are: Reliance Industries, Infosys Technologies, Larsen and Toubro, Bharti Airtel and Hindustan Unilever. The weights given to stocks in the Shariah index differ from what it is in the master index — Nifty.

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