Shariah Investments in my portfolio, no thanks!

Benchmark Mutual fund announced a Shariah compliant fund recently. Of course many mutual funds (Reliance, UTI, to name 2) are all in the process of launching and managing a Shariah compliant fund.

What is a Shariah compliant fund? And what does it do?

Shariah, the religious law of the followers of Islam, has strictures regarding finance and commercial activities permitted for believers. Arab investors only invest in a portfolio of ‘clean’ stocks. They do not invest in stocks of companies dealing in alcohol, conventional financial services (banking and insurance), entertainment (cinemas and hotels), tobacco, pork meat, defence, pornography and weapons. According to experts in Islamic investments, Muslims are only allowed to invest in companies where interest bearing income is less than 10% in any condition.

India has a very high shariah compliant list of shares – With regards to compliance, the current share of Indian Shariah-compliant market capitalisation (at 61%) is high when compared with countries such as Malaysia (at 57%), Pakistan (51%) and Bahrain (6%).

Of course personally I am neither a fan of such a fund nor against it. In India anyway there are no listed companies in pork meat, defence, porn or weapons. Regarding tobacco I do not smoke, hope the kids in our house do not smoke, but am realistic enough to know the value that ITC brings to my portfolio! Once upon a time as a member of National Stock exchange I had a tough time asking my Jain customers to hold on to Tata Steel (remember they went into shrimp exports to claim tax benefits? – you need to be born in the early sixties at least!!). I do not like any ‘ism’ in my portfolio, but would happily invest in the Vice Fund (fantastic out performance in down times! – Merrill Research report).

Using conscience as a guide is not very useful! Companies which treat their employees, vendors, associates, badly may be making money for you. Are ITC, Coke, McDonalds, Smith & Wesson, not enough as examples?
This downturn isn’t shaping up to be any different. Spending on vices may not fall as much as spending on cars, houses, etc. A recession proof industry where new entrants cannot enter easily (did you ever think that the advertising ban on cigarettes is a fantastic moat for ITC?), fantastic margins,…what more can you want as a shareholder?

Alcohol consumption (therefore tobacco?) actually must be going up in a downturn – because you drink when you are happy, you drink when you are sad! Of course the hedger that I am would also happily invest in a de-addiction company also – provided it is listed.

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  1. Dr Mohammed Ali Khan

    One good feature is that the shariah compliant funds don’t invest in companies with much debt on it’s books.. Don’t we look for companies with less debt on their books?

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