The Reserve Bank of India (RBI) few days ago said no to Islamic banking in India, after examining details of Islamic or Shariah banking. However, investing in Shariah funds is an option still available for people who are looking for ethical investment options. Such funds, typically, do not invest in certain kinds of companies such as tobacco, alcohol and interest lending business, among others.
Currently, there are three funds available in the market — Tata Ethical Fund, Taurus Ethical and Reliance ETF Shariah BeEs. Gopal Agrawal, chief investment officer (equities) at Tata Mutual Fund, says, “Buying stocks in ethical funds compared to other diversified funds is different because there are certain mandates while buying in ethical fund. There has been approved list of stocks and we invest within that universe only.” There are 270-300 stocks approved by the Shariah board. But, if suppose by any chance they include the stock which are not Shariah compliant, the fund manager needs to exit the stock within 90 days.
Such funds are mostly large-cap or multi-cap in nature and invest in sectors such as FMCG, services, automobiles, engineering and construction among others. Returns of such funds have been in line with markets even though they don’t invest in financial companies. For example, Reliance ETF Shariah BeEs has given returns of 32.28 per cent in the last one year, while Tata Ethical fund has given return of 23.44 per cent in last one year. While for five year time frame such funds have given returns in the range of 15-16 percent.
“There are many religious trusts and communities who don’t believe in interest income. But I would also like to say that, common investors can also look at this funds,” adds Agrawal. In comparison, the equity large-cap category average returns over one year is 23.23 per cent. And over five years, it is 14.69 per cent. The best performing fund in the large-cap category is JM Core 11 fund which has returned 35.51 per cent.
Despite proving positive returns, analysts say these funds are purely for people who are following Shariah laws. “Shariah funds did exceptionally well after 2008 slowdown, simply because banking and financials sector had taken the hit and these funds were free of those sectors. But now with economic uptick, it will be difficult for such funds to outperform other diversified equity funds because they don’t invest in banking and financial companies,” said Vidya Bala, head, mutual fund research, FundsIndia.
Analysts also say these funds can also be used at contra bets because Shariah funds are allowed to invest in pharmaceutical, software and auto firms which are also India’s biggest exporters. However, they also add that, these funds can be purely for investors who follow Shariah laws and don’t have any other option to park their money.
“For ones who follow Shariah laws and not invest in other funds is the best option for them. It’s better to invest in such funds than investing in other unregulated products,” says Pankaj Mathpal, founder and managing director at Optima Money Managers. Such funds are better for them because they don’t invest in bank fixed deposits neither in insurance or other financial product where interest income is earned. Market participants say common investors would be better off by investing in equity diversified equity funds rather than such ethical funds.