Islamic Mutual Funds: Sharia Mutual Funds

Recently, there has been a big hike in Islamic banking and Islamic investment instruments and financial products.
Along with US, UK, Middle East and Europe, India too is expected to catch up soon with financial products that comply with Islamic principles of money management and investments.

In this article, I will try to cover the basic principles behind the Islamic financial instruments and their working. A good example of "How Islamic Mortgage Work?" is available here (Opens in a new window)

As per the Islamic laws, charging interest on any transaction is illegal This forms the basis of Islamic investments and mortgages. Hence, it becomes difficult for Muslims to take up loans like home loan, mortgage or any other financial transactions, if they have to strictly comply with their religious faith and Shariyat laws.

Sharia scholars on the council prohibit investments in businesses that charge interest or have a debt ratio greater than a third of their assets. Industrial companies that have financing units, such as Ford Motor Co. and General Electric Co., are among those failing the test. Hence, no investments can be made in these companies. Banking is not the sector for Islamic investments, unless it is an Islamic bank working on Islamic principles.

The Islamic mutual funds also can't invest in companies that generate operating income from un-Islamic activities, including pork processing, tobacco, liquor, pornography and gambling operations. That takes away big companies like Benson and Hedges, Liquor companies, lot of online website companies, etc.

Typically, they end up investing in Energy stocks, like Exxon Mobil and BP, Utilities companies such as FPL Group Inc., textile stocks, etc.

Luckily for moneyed Muslims, there are a number of Islamic Financial Institutions (IFFs) out there catering to the needs of the devout. Over 250 of them to be exact managing funds totalling more than $300 billion (as per data for 2006). And with more and more Muslims interested in pious repositories for their assets, even financial institutions in the West are getting into the act.

According to the Koran, trade is allowed but not interest. Thus Muslims are forbidden from paying or earning interest on their investments and Islamic banks cannot lend their money in the form of credit. Furthermore Muslims cannot invest in companies counter to their religious beliefs, such as those involved in alcohol or gambling, pork products, pornography, or armaments.

The world market is fast growing in for the Islamic Mutual funds and investments. Middle-east has been the front runner in the race to launch the Islamic investment products and funds, but US and Europe did not take much time to identify the opportunity and join the race. The world is already full of financial products and investment instruments that fulfill the Islamic laws of investment.

Not only across the globe, Indian markets are also fast developing such funds. Recent hype in Indian financial industry has led the mutual fund management companies to look into the money management industry complying with Islamic principles, because they know very well that India houses the second largest muslim population in the world (just after Indonesia). Millions of Muslims are still not betting their money in financial instruments just because their working does not comply with their religious faith.

Coming to the returns from such funds, the same concept applies here. Since these kind of funds are restricted to a set of industry sectors, their performance depends upon how the sectors and their stocks have performed. There is no guarantee of anything.
Be prepared to see loads of funds coming in the market very soon.