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Investing in Mutual Funds is forbidden (HARAM) in Islam Dr Zakir Naik

Introduction to Islamic Investment Fund


Scheme Highlights

  • Tata Ethical Fund is a Shariah Compliant Equity Fund.
  • It’s one of the ‘Only  One ’ Shariah compliant MF scheme in Indian Mutual Fund House.
  • Tata Fund Size Rs 513 Crores
  • Tata Ethical Fund is the longest running Ethical Fund. Inception in 1996
  • As such Tata Ethical Fund has a competitive edge in terms of no meaningful competition

Shariah Monitoring & Shariah Vetting Authority

The fund’s investment universe is government by Shariah Guidelines as advised and monitored by UAE based Dar Al Sharia Legal and Financial Consultancy LLC. Dar Al Sharia is a one-stop Sharia solution provider pioneering in the provision of complete Sharia advisory and consultancy services to all Islamic Finance segments namely Islamic banks, Islamic finance companies (including Islamic windows), Takaful companies, Islamic Funds and Sukuk.The portfolio is reviewed every quarter by Dar-Al-Sharia. On such a review, if it is found that any particular eligible stock has undergone changes in business features which do not fit the above parameters then there is a purification process which removes the said exposures from the universe of eligible stocks.

Shariah Investment Restrictions/Guidelines

Prohibited Investments

  • Investments Sector Restrictions: Alcohol, Tobacco, Pork, Gambling, Weapons & ammunition, Entertainment, Hospitality & Hotels
  • Investments in Conventional Finance Institutions based on Riba (Interest) or Gharar like Banks and NBFCs
  • Investments in Derivatives (Speculation Activities)
  • Other Non-Shariah Compliant segments

Permitted Financial Ratios for Investment in Companies other than Prohibited Investments

  • Cap on Interest Bearing Debt – The total interest-bearing debts (i.e. non Sharia compliant borrowing including but not limited to short-term debts, long term debts, bank overdrafts and preferred capital if any) of the company must not exceed 30% of its trailing 12 month average market capitalization if it is a listed company, total assets if the company is unlisted
  • Cap on Interest Bearing Lending – The interest bearing or non-Sharia compliant lending / investments (including but not limited to interest paying fixed deposits, bonds, investments in Prohibited Activities or companies indulging in Prohibited Activities) by the company should not exceed 30% of its trailing 12 month average market capitalization if it is a listed company, or total assets if the company is unlisted
  • Cap on Non-Operating Assets – The cash (liquid assets), trade receivables, investments and other debtors put together must not exceed 70% its trailing 12 month average market capitalization if it is a listed company. If the company is unlisted this ratio will not apply
  • Cap on Interest & Other Prohibited Income – The income from interest and other Prohibited Activities (including non-Sharia compliant activities including the dividends income from non-Sharia compliant investments and subsidiary companies) must not be higher than 5% of the total income.

While for community investors, Shariah Compliance Investment Option is the pitch, why should Non-Community Investors Invest in the Fund?

Cap on Interest Bearing Debt – Restricts investment in leveraged companies. This is one of the most powerful criteria which has augured well for the fund since the year 2008 when under the stressed economic and credit environment, highly leveraged companies were punished by the markets.

Companies which were over leveraged faced difficultly in loan repayment and interest servicing as the business plan projections for which the borrowings were made gradually become unviable.

Cap on Interest Bearing Debt & Restriction on Banking & NBFC Companies – Strain from leveraged borrowing by corporates also reflected in the Non-Performing Assets of the Banking & Sector which took a hit on its books in terms of provisioning and accordingly valuations in the market. Restrictions on fund’s investment in banking sector thus also saved the portfolio from impact of volatility in the banking sector over last couple of years.

Cap on Non-Operating Assets & Interest & Other Prohibited Income – Ensures investment in companies which have ongoing operations and where assets are deployed for operating purposes and have an efficient Asset Turnover Ratio.

As such the fund does not invest in ‘hope’. Hope that the leveraged investments on future business plans after servicing debt will better ROE. It invests in companies with high internal Cash generation, high capital efficiency and companies who earn more from their businesses rather than treasury income.

Does these Investment Restrictions Impact Fund’s Performance?

It is true that the Shariah guidelines restrict the Investment Universe. For example, out of the BSE 500 Stocks, this fund can invest in only 229 Stocks. So over half of the investment universe of is out of the investment purview of this fund.

It is also true that at various points in time when the ‘non-available’ segment of the market rallies it impacts fund’s short term performance relative to other diversified fund.

But the fact is that even with the restricted investment universe (available to other diversified equity funds) the fund competes well with diversified equity funds and at various phases outperforms. It is a diversified equity fund, and is a part of our diversified equity peer set and hence competes with about 59 select diversified equity funds set which our other diversified equity fund; Tata Equity Opportunities Fund competes with.

Offers an Efficient Risk Reward Proposition – Unmistakable Traits of a True Value Proposition

Data Range – July 2013 to June 2016. 1Month Rolling. Daily Frequency

  • Tata Ethical Fund has a very attractive risk reward proposition with the fund ranking 9th out of 59 Diversified Equity Funds on Sharpe Ratio (Risk Adjusted Returns)
  • This is possible because, the fund has “THE LOWEST STANDARD DEVIATION” amongst 59 Diversified Equity Funds
  • “Lowest Beta to Nifty” among 59 Diversified Equity Funds
  • This leads to its position as 4th best funds in terms of Treynor Ratio which gives the risk adjusted returns where risk is defined as beta
  • Has the “6th Lowest downside risk” among 59 Diversified Equity Funds

Portfolio Strategy

Portfolio of companies with above mentioned characteristics have potential to perform well both in bull and bear markets and create long term wealth. Such companies generally do not need large external debt to fund their growth, as their internal cash generation is high. Thus their ability to grow is very good irrespective of the external liquidity conditions. We feel this is a very important characteristic, particularly in the post-2007 credit crisis world.

The fund is benchmarked to Nifty 500 Shariah Index and there are times when the fund tends to underperform the index this is because as per Dar Al Sharia guidelines the fund cannot invest in Reliance Industries Limited which has a more than 10% weight in the Index. Thus the fund will always be underweight the petroleum sector compared to benchmark index.

The Fund not only invests in defensive sector but has exposure to growth sectors like Auto & Auto Ancillaries, Cement and Consumer Durables.

To Summarize

The fund’s underlying investment mandate offers an excellent risk reward proposition as a diversified equity fund ‘with Value Focus’ for long term investors. In the current stressed global economic environment, a portfolio focusing on companies with free cash flows, high efficiency and return ratios offers an attractive risk reward proposition to long term investors.



Total = 35.25 + 58.02 = 93.27 Lakh