Mutual Funds Day 43: Halal Mutual Funds
Today we are discussing a specific category of mutual fund called Halal mutual funds. You might have heard the terms halal meat, halal foods, etc. When it comes to investing, halal means pure.
According to Sharia Law, muslims cannot invest in companies producing or promoting sinful goods like alcohol, tobacco, drugs, gambling etc. They cannot even invest in companies earning “interest income”.
While avoiding sin goods is understandable, staying away from banks & financial sector would be practically difficult. The weightage banks & financial services companies have on our capital markets are pretty huge.
Financial services account for 32.76% weights on the Nifty index and have been the backbone of India’s growth story for the past 3 decades. Over time, the weights have come down as technology, healthcare, construction, and consumables have risen. But I believe, banks will stay in the forefront for many more years to come unless crypto is recognized as a reserve currency.
First, we list out the restricted items:-
- Banks & Financial Services — This rules out all debt mutual funds. It also rules out hybrid funds like conservative, balanced, and aggressive as there are debt components in it.
- Tobacco
- Alcohol
- Gambling — gaming, entertainment.
Then the investible universe could be:-
- Technology
- Healthcare
- Infrastructure
- Real Estate
- Commodities (excluding tobacco, pork etc)
- Consumption (excluding tobacco, pork etc)
- FMCG (excluding tobacco, pork etc)
- Energy (unless aiding military set ups)
There is a catch here too, a company from the investible universe could earn income as interest by holding its working capital in some banks, trusts, or money markets.
If you take the example of TCS, it has received an interest income from its investing activities of ~ 2990 crores in March 2024. Ideally, this should not be a halal firm, but it is.
While the rule could be followed with 100% perfection in other countries like the UAE, it is nearly impossible to find a pure company in India. The next best option is to find the purest companies from the lowest impure list.
The best approach would be to find thematic or sectoral funds like technology or healthcare. Open their factsheet see the portfolio holdings and check if any sin companies are on it. If not, then go ahead and then select them. This is not a foolproof method, but it is much better than handpicking stocks as direct equity investing comes at a greater drawdown risk than mutual funds.
I have a few extremely religious clients but with a super strong investor mentality. If they are unable to weed out a sin company, they still go ahead with the investments and then mark out the weightage of the firm and denote them as zakat.
It is always recommended to talk to your investment advisor if you have similar concerns. After all, peace of mind is equally important as above market returns.
Next Chapter
Intraday Algos run via AlgoTest on Kotak
Webhooks automation run via TradingView on Dhan
https://viswaram.com/mutual-funds-day-44-sips-but-with-adhoc-lumpsum-in-between-step-up-sip-with-step-up-l-4fe5e9c5197ehttps://viswaram.com/mutual-funds-day-44-sips-but-with-adhoc-lumpsum-in-between-step-up-sip-with-step-up-l-4fe5e9c5197e