Factors to Consider Before Investing in Shariah-Compliant Stocks.
Tuesday, Aug 20, 2024
Most of us might not be familiar with Shariah-compliant investments or the new type of investing might have caught your eye.
Shariah investment created by Islamic scholars abides by Shariah law, which makes investing in stocks accessible to Muslims. As they follow certain values inherently, investing in conventional stocks isn't their go-to thing unless they are screened and adhere to the rules of this law.
Though it was created with a specific purpose, they is now accessible to anyone interested in ethical value-based investing or otherwise socially responsible investing.
Since you are new to this form of investing, in this article, let's wrap our heads around the factors to consider while investing in Shaush funds in India.
The main principle of Shariah-compliant investments
Firstly, by Shariah compliants we mean these are financial instruments that follow the rules set by Shariah law.
The fundamental principle here is that they see money as a value and not an asset. Making money from money such as interest is strictly prohibited by them rather than from shared business risk.
When interest is ruled out, it means banks and interest-giving investments are out of their way as per their rules.
While that's just one principle, there are many others that you can see in Shariah-compliant investments, which you can read here. (Internal linking to other blog)
Factors to consider while deciding to invest in Shariah funds in India
1. Knowing their screening process
The stocks are screened based on set rules, as the stock selection needs to meet Islamic standards.
Therefore, you must first understand their screening criteria as an investor. There are two things in the process, business sector screening and financial ratio screening.
2. Performance
Before you invest in any instruments, checking their performance is crucial, and in fact, comparing them with similar conventional instruments can help you understand their performance better.
Don't have the notion that, due to restrictions in the selection of stocks, Shariah-compliant investments might poorly perform. It has shown that it can perform comparably well and outperform the traditional option.
3. Limited Diversification
Due to their strict evaluation of selection, the availability of investment options is limited. The popular advice of diversifying your portfolio may not widely happen here.
Having known about this and your portfolio requirements, see if they align with your goals.
4. Costs and Fees
Since they need extra attention to screen appropriately, the fees and cost of the investment go up. You need to see the fee structure before investing in one to understand whether it's doable for you.
5. Regulatory Conditions
The framework of regulation differs from country to country and it's evolving, not established. Although demand has increased recently, you need to watch out for regulatory changes regarding this investment to stay informed.
6. Purification Process
Though they are screened to follow the selection criteria, it's inevitable for some companies to not have interest income.
In such cases, the income from such income is calculated and donated to the charity. Learn about how this process works for the Shariah funds in India.
7. Risk Tolerance
Like any other investment, Shariah-compliant funds have risks associated with them too. Despite what learning about the investment risk needs to be known.
Consider this aspect to see if the risk profile of the stock meets the risk profile of your portfolio.
8. The time horizon of an investment
The goals and investment horizons for each investment are different and an investor must self-assess if any meet their objectives.
This holds good for any goals that you have, be it children's education or retirement savings, the Shariah-compliant funds must meet your objectives.
9. Exposure
The Shariah funds in India can vary, with some exposed to only local markets and others exposed to global markets as well.
Based on your objectives, understand what type of exposure you are looking for.
10. Liquidity concerns
Some stocks may not be liquid in the secondary market and they might need some careful consideration before you invest.
You need this anytime to access funds and hence you shouldn't compromise on this factor of certain stocks.
Wrapping up
Considering Shariah funds in India are a new way of investing that makes you a socially responsible and ethical investor, it can help you achieve returns if these factors are kept in mind.
Well, it has intricacies of selection, in particular those that can bifurcate further in the process and are only known to financial advisors.
It's always a good idea to invest in Smallcases that are well researched by experts who understand these intricacies to be able to earn good returns from Shariah-compliant investments.
Find one such Shariah-compliant investment here, created by the SEBI-registered company GreenPortfolio, which offers portfolio management services and Smallcases to investors.
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