Understanding Shariah Compliant Funds: What Are They? sameer October 20, 2022

Understanding Shariah Compliant Funds: What Are They?

We may have come across different methods or procedures to make an investment. The most common goal of making an investment is to generate revenue. With that being said, we need to also knowledge ourselves with policies that will support these actions. In this article, you will learn about ‘SHARIA” – the term Shariah is derived from the Arabic language. In English, the words mean “the way”. Sharia is widely referred to as the moral and ethical principles drawn from the holy book – the Quran, and the practices of Prophet Muhammed (SAW).  WHAT IS SHARIAH COMPLIANT FUNDS? Funds or investments made into any financial organisation, adhering to the rules and guidelines laid by Islam, is termed as Shariah complaint Funds. Shariah-compliant funds operate on specific rules and guidelines. It restricts the idea of earning returns from businesses that are restricted against the Law of Shariah, such as – gambling, alcohol, weapon supply, pornography and supply of red meat (pork). It operates by appointing a specific shariah board, frequent audits to check on banned incomes, such as interest, by offering them to institutions such as charity. These funds target sectors such as real estate and exchange funds. Typically investments on private organisations is considered as a wise investment, however, any returns carrying returns is treated negatively in the eyes of Shariah law.  THREE CENTRAL SHARING INVESTING PRINCIPLES INTEREST IN FORBIDDENInvestors are not allowed to receive or pay interest on their investment or any form of investment. Banks would also recommend account holds to opt for interest-free investments, whether it is mutual funds or fixed deposits. PROHIBITS INVESTMENT IN CERTAIN SECTORSShariah-compliant funds operate on specific rules and guidelines. It restricts the idea of earning returns from businesses that are restricted against the Law of Shariah, such as – gambling, alcohol, weapon supply, pornography and supply of red meat (pork). According to the Law of Shariah, procuring interest from any means of investment is an act of punishment and has strict regard against its customs and duties for an individual with faith.WEALTH The Law of Shariah also demands an individual who has been making fair earnings from themselves to donate a certain amount of wealth from their earnings as a form of charity to someone who are below them. It is practised and believed that such an act of charity will bring light to ones attained wealth.  INVESTMENT METHODS ACCORDING TO THE LAW OF SHARIAHInvestment into a mutual fund and stock is predictable according to the Law of Shariah. In India, banks offer mutual funds that adhere to the laws of sharia. These funds then used your money and invested them in organisations that operate on a social cause. Growth, diversification, and revenue is targeted by these funds keeping in line with the principles of the shariah rule.   WHAT EXACTLY IS SHARIAH LAW? Shariah law, which is based on Islamic Law, includes the following prohibitions on businesses:
  • PROHIBITION ON GAMBLING – has been considered as against the Law of Shariah. An individual must subtract itself from such practices, and any revenue generated through gambling will be against the Law.
  • The Law of sharia halos suggests refraining from taking loans that incur interest during repayment of the loan. Any practice of paying or receiving interest is considered to be unlawful. In order to avoid this, individuals indulge in partnerships in order to split their earnings.
  • Investments on drugs, alcohol, and cigarettes are strictly prohibited according to Shariah law. As a result, industries have shortened the investment portal for people who are practising the rules of Shariah.
 SHARIAH LAWThe Law of Shariah categorises all human behaviour into the following five groups:
  • Obligatory
  • Recommended
  • Permitted
  • Discouraged
  • Forbidden
 Sharia comprises four basic elements:Aqidah – In other words belief, refers to manifestations on an individual in accordance with trust and belief in Allah that a Muslim possesses.Fiqh – The relationship between a person and his or her Creator (ibadat) and other people is governed by fiqh (muamalat). Muamalat – In terms refers to mental and physical approach towards social, political, and economic activity. As a result, through the basis of muamalat, Islamic financial recommendations, that primarily include economic activity, is connected to Sharia rules.Akhlaq – The term “akhlaq” refers to approach or outlook of work ethic practiced by a Muslim.The above mentioned elements play a major pact towards a Muslim. It contributes to their decision making, investment and other aspects of everyday life. Combining these, one recognises a weightage specifically dealing with their finances. The combination of aqidah, ibadah, and akhlaq, muamalat rules include those governing contractual law transactions, criminal Law, the judiciary, and Islamic finance. FACTORS WHILE IMPLEMENTING A FINANCIAL INVESTMENTShariah funds examine possible portfolio investments for particular requirements as requested by Muslims, just as other socially conscious funds under the Environmental, Social, and Governance (ESG) sector. Companies that deal with the production of firearms, alcohol, or gambling are not included in investments made by shariah funds.Shariah funds make investments in exchange-traded funds, real estate, and private equity.Islamic scholars serve as the funds’ advisors and provide investment advice. A century of Ten years came across Shariah-compliant funds grow at an annualised pace of 26%, according to a research by the consulting firm PricewaterhouseCoopers (PwC) in 2011.Due to the fact that a large portion of investments are made through private placement, it is rather challenging to determine the industry’s size or valuation. The lack of secondary market trading for the funds limits our understanding of their composition.The implementation of these funds necessitates a lot of work because there are several regulations and guidelines dictated by Shariah principles that must be followed.These regulations may increase the difficulty and expense of managing a Shariah-compliant fund.  SUMMARYInvestment in accordance with the established principles and ideals of Shariah is known as Shariah investing. The Islamic tradition dictates that you must invest your money in a morally and socially responsible manner. It implies that your investments benefit society as a whole in addition to you personally.

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