Shariah-Compliant Funds

Reviewed by Sweta | Updated on Sep 28, 2020

Introduction

Shariah-compliant funds are funds that follow the principles of Shariah law. The investment portfolio of these funds is in-line with the Islamic religion.

Understanding Shariah-Compliant Funds

The Shariah-compliant funds are socially responsible. As per Islam, the followers should not invest in anything that causes harm to anybody or the environment. Therefore, investments are to be made in companies that adhere to the Shariah law.

Factors to Consider

  1. Similar to other socially responsible funds within the Environmental, Social, and Governance (ESG) universe, Shariah funds screen potential portfolio investments for specific requirements as desired by the Muslims. Shariah funds do not invest in companies that deal with the production of weapons, alcohol, and gambling.

  2. Shariah funds invest in private equity, in real estate, and exchange-traded funds.

  3. The funds have Islamic scholars as their advisors who advise on investment decisions.

  4. As per the consulting firm, PricewaterhouseCoopers' (PwC) report in 2011, Shariah-compliant funds grew at an annualized rate of 26% over the first ten years of this century.

  5. It is relatively difficult to estimate the industry's size or valuation because much of the investment occurs through private placement. Since the funds are not traded in secondary markets, it provides less insight into their constituents.

  6. These funds require considerable effort to be implemented as a lot of attention must be paid to compliance with the extensive set of rules and requirements guided by the Shariah principles.

  7. These rules can add complexity and costs to the management of a Shariah-compliant fund.

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