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Are Mutual Funds Halal?

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If you are a Muslim-faithful investor, you would have certainly searched for halal investment options. This is most likely what brought you here to know if there is such a thing as halal mutual funds. Halal mutual funds exist and in this article, we discuss how to recognize them, the benefits, risks, types and examples. 

Key takeaways:

  • With halal mutual funds, there are no interests (Riba). Hence all profit-centric investments must be avoided.
  • Some of the factors that make an investment company halal include the business the company is engaged in, the percentage of interest-related income, and trading practices.
  • A mutual fund is halal if it is shariah compliant. It must be focused on social justice and ethics as well as partnerships so all transactions are mutually beneficial.

Jump to a section.

Is Investing in mutual funds halal?

According to Islamic laws, there are certain conditions that an investment company must fulfil before a Muslim is allowed to invest. If the investment company fulfils them, then it makes the mutual fund halal.

List of halal mutual funds in Nigeria

  • Lotus Halal Investment
  • ARM Ethical Funds
  • United Capital Sukuk Fund
  • Lotus Fixed Income Fund
  • Stanbic IBTC Shariah Fixed Income Fund

Halal stocks and Halal mutual funds

Stocks in businesses that follow halal principles are known as halal stocks. 

If certain requirements are met, investors are permitted to make stock market investments under the Islamic tenets of Shariah. Any gains a person receives from investing in halal shares are also regarded as halal. 

Halal stock put simply is a stock that is permissible for a Muslim to invest in because it meets certain requirements. 

Halal mutual funds

These share similarities with traditional mutual funds but there are a few exceptions. 

With halal funds, there are no interests (Riba) or financial penalties (Gharar). Hence all profit-centric investments must be avoided.

Investments in halal mutual funds are in shares of joint stock companies, and earnings are achieved through both dividends received from the companies and capital gains in the market. 

These companies’ line of work must adhere to Shariah law (for instance, exporting Halal meat), and they cannot engage in any unlawful practices.

If these criteria are satisfied, trading in mutual fund shares that comply with Shariah is permitted.

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Benefits and risks of halal investing

Just like any other form of investment, Halal investing has its risks and benefits. 

Benefits: 

  • Halal investing encourages a more disciplined approach which forbids short-term speculations and reduces the risks of loss
  • Provide a sense of security for Muslim investors 
  • It is low-risk

Risks:

  • Low-profit returns 
  • Lack of portfolio diversification 
  • Limited opportunities 
  • Time-consuming research 
  • Difficulty selling investment vehicles

How to know if an investment company is halal

An investment company is halal if it is shariah compliant. It must be focused on social justice and ethics as well as partnerships so all transactions are mutually beneficial. 

Some of the factors that make companies halal include the business the company is engaged in, the percentage of interest-related income, and trading practices. A company must not engage in illegal dealings e.g gambling, alcohol or pornography. 

This is why in-depth research on the company’s history and policy is essential before deciding to invest. 

Types of halal investment vehicles

Gold

Gold is considered to be a secure and time-tested option that complies with Sharia law. It frequently increases in value, is simple to invest in, and is not seen to violate any Islamic finance regulations.

Properties

For Muslims, investing in real estate is also a good option. The one restriction is that if a mortgage is obtained, it must be a halal mortgage free of riba.

Sukuk bonds

Since Sukuks don’t pay interest, they are an alternative to traditional bonds. They are often asset-based and are frequently referred to as Islamic bonds. Because they belong to the “fixed income” market, they are considered to be cautious investments. Sukuks can produce revenue for halal investors without going against Sharia law.

Ijarah investments

This refers to rental income. An asset’s owner transfers the ownership to a third party for a predetermined amount over a predetermined length of time. Ijarah funds are based on the concept of Ijarah. The subscription amount is used to purchase assets, such as real estate, vehicles or machinery, and they are leased out to users. The Ijarah funds own the assets, and rentals are the profit of the subscribers.

Examples of haram investments

Haram is the opposite of Halal and it means not permissible, forbidden or prohibited. 

Some investments that are considered haram include: 

  • Cryptocurrency
  • Pork related industries
  • Prostitution, Pornography and the Adult entertainment industry
  • Alcohol, cigarettes, drugs
  • Media that promotes gossip, vanity, and profanity 
  • Forex trading 

Watch this video on how to create a halal mutual funds account on Cowrywise:

Bottom line

Halal investments encourage Muslims to invest responsibly and ethically. Therefore, you need to do your findings. Research the company’s business plan, source(s) of income, and if it relies on interest before investing.

Ready to start building wealth according to your values? Create an halal account now.

RELATED:

Halal Investing in Nigeria

What are Sukuk Investments?

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