Investing in Shariah-Screened Equity Mutual Funds in India

How a Shariah equity fund operates

A Shariah fund is an ordinary open-ended equity scheme with an extra investment restriction. The fund manager may buy only stocks that pass a Shariah screen, and holds idle cash in non-interest form where possible, accepting slightly lower flexibility than conventional funds.

Screening rules behind the portfolio

Companies are excluded if their core business involves alcohol, tobacco, gambling, pork, conventional banking or insurance, or entertainment considered impermissible. Financial ratios then test debt, interest income and receivables, usually against one-third thresholds derived from AAOIFI or index-provider methodology.

Benchmarks used in India

Shariah funds compare themselves with indices such as the Nifty500 Shariah or the BSE 500 Shariah TRI used by Taurus Ethical Fund. These indices exclude most banks and non-bank lenders, so the funds lean towards information technology, pharmaceuticals, consumer goods and industrial companies.

Tax on Shariah equity funds

These funds are taxed like any equity mutual fund. Long-term gains on units held over twelve months are taxed at 12.5% above ₹1.25 lakh a year, short-term gains at 20%, and dividends at the investor’s slab rate.

Which funds are available?

Tata Ethical Fund is the longest-established and largest Shariah-screened fund, certified by the Mumbai adviser TASIS, which also certifies the UTI Nifty 500 Shariah Index Fund. Taurus Ethical Fund invests on Shariah principles, and Nippon India offers a Shariah ETF.

Regulation by SEBI

All schemes are governed by the SEBI (Mutual Funds) Regulations, 1996 and SEBI’s scheme categorisation rules, which place Shariah funds in the thematic category. AMFI-registered distributors and SEBI-registered investment advisers may sell or advise on them.

Limits investors should accept

The choice is narrow, with few fund houses offering a Shariah scheme. Because financial stocks are excluded, performance can differ sharply from the Nifty 50. No Shariah-compliant debt fund exists in India; gold ETFs, which TASIS lists among compliant products, are the usual diversifier.

Purification and zakat

Dividends from screened companies may contain a small proportion of interest income. Investors calculate purification using figures from the fund house or a Shariah adviser and donate it. Zakat is typically assessed on the market value of units or the zakatable assets of holdings.

Direct plans versus regular plans

Every Indian mutual fund offers a direct plan bought straight from the fund house and a regular plan sold through distributors. The direct plan has a lower expense ratio because no commission is paid, which compounds into a meaningful difference over decades.

Portfolio management services

Wealthier investors can use portfolio management services, which SEBI permits only above a minimum investment of ₹50 lakh. TASIS lists the Geojit Ethical Portfolio among its certified clients, showing that Shariah-screened discretionary portfolios exist beyond mutual funds.

Checking compliance month by month

Shariah status of companies changes as debt levels and business mix evolve. TASIS publishes a monthly updated list of compliant stocks used by fund managers and brokers, and investors can compare a fund’s holdings with it when portfolios are disclosed.

Gold as a complement

Gold ETFs and gold fund-of-funds holding physical metal are commonly used alongside Shariah equity funds; TASIS refers to Shariah-compliant gold and silver ETFs. Sovereign Gold Bonds pay fixed interest, so many scholars advise against them despite their tax advantages.

SIPs through market cycles

Monthly SIPs buy more units when prices fall and fewer when they rise, smoothing the purchase price. Shariah funds can underperform for years when banks lead the market, so sticking to the plan matters more than reacting to short-term rankings.

Starting a SIP in a Shariah fund

1. Complete KYC with PAN, Aadhaar and a bank account through a KYC registration agency or the fund house.
2. Read the scheme information document to confirm the Shariah mandate and benchmark.
3. Choose the direct plan to avoid distributor commission, or the regular plan through an adviser.
4. Register a systematic investment plan with a mandate from the bank account.
5. Nominate beneficiaries, keeping Muslim inheritance rules in mind.
6. Track purification notes and capital gains statements each financial year.
7. Review performance against the Shariah benchmark at least once a year.

Costs and documents

Frequent mistakes

• Assuming every “ESG” or “ethical” fund is Shariah-compliant.
• Investing lump sums needed within one or two years in a volatile equity fund.
• Choosing the regular plan without knowing the commission paid to distributors.
• Ignoring purification of the interest component in dividends.
• Selling within the exit-load period and paying both load and short-term tax.

Can NRIs invest in Indian Shariah funds?

Yes, NRIs can invest from NRE or NRO accounts after KYC. Residents of the United States and Canada face restrictions at some fund houses because of FATCA reporting, so checking the scheme’s accepted countries before applying avoids rejected applications.

Which Indian funds carry Shariah certification?

TASIS lists Tata Ethical Fund, the Tata Indian Shariah Equity Fund and the UTI Nifty 500 Shariah Index Fund among its certified clients. Taurus publishes its own Shariah audit certificate, and TASIS states that it does not certify Taurus Ethical Fund.

Are Shariah funds riskier than diversified funds?

Their risk is similar to other equity funds, but concentration differs. The exclusion of banks and financial services, which form a large part of the Nifty 50, increases the weight of technology and consumer sectors, so returns can diverge for long periods.

Can Shariah funds be used for tax-saving under section 80C?

No Shariah-screened ELSS scheme is currently offered, so Shariah funds do not qualify for the section 80C deduction. The new tax regime, now the default, does not allow the 80C deduction in any case.