This site uses cookies. Some of the cookies are essential for parts of the site to operate and have already been set. You may delete and block all cookies from this site, but if you do, parts of the site may not work. To find out more about cookies used on Trustnet and how you can manage them, see our Privacy and Cookie Policy.

By clicking "I Agree" below, you acknowledge that you accept our Privacy Policy and Terms of Use.

For more information Click here



It's look like you're leaving us

What would you like us to do with the funds you've selected

Show me all my options Forget them Save them
Customise this table

Shariah Law Guide


Implications on Risk & Return

As is the case with other ethical investment vehicles, an extra layer of rules restricts fund managers from certain investments which some argue may result in lower returns or more volatility than equivalent counterparts that can invest more freely in a larger investment pool.
Because of the concept of risk sharing and the restrictions on Riba and gambling, Shariah compliant funds are less able to invest in financials, companies that are heavily leveraged, and dividend paying equities which can potentially affect risk and return.
In particular, financials are traditionally very stable investments with low volatility – although recent history has shown nothing is ever a safe bet thanks to the credit crunch – and they often included in investment portfolios to calm this risk factor.
Dividends are usually paid by well established large companies that are again traditionally more stable investments. The problem with dividends is that most companies in the contemporary stock market usually partake in some form of interest bearing activity, as interest is earned by simply keeping funds in a conventional bank account, some of the interest that is earned filters through to dividends therefore making them Haraam. Nonetheless, generally accepted principles allow for some impermissible income, which is capped at 5% of total revenue.
Additionally, there are 2 other generally accepted accounting restrictions in Shariah investing that will affect investors. First, Shariah compliant companies must maintain a debt to equity ratio that is less than 33%, prohibiting Muslims from investing in highly geared companies which often give higher returns in terms of capital gains. Moreover, compliant companies are only allow to have less than 45% of accounts receivable as a percentage of debt to equity.
Shariah compliant funds do have ways to circumvent some restrictions, for instance Muslims can invest in dividend paying investments and open conventional bank accounts if the interest is nullified by a process known as ‘Purification’, whereby additional earnings are given to a charity for example (for the conventional investor this is an obvious loss on potential returns). Moreover, sometimes there are different interpretations and revisions to Shariah rules for example one recent development is a debate between scholars about whether certain trading practices and derivatives today are really Haraam.
Shariah Advisory Board
Shariah compliant funds have to be supervised by a group of accepted Islamic scholars that vet investment instruments and companies that the fund invests in, advise fund managers on the various issues surrounding Shariah investments and also conduct continuous due diligence on invested funds to ensure that everything is Halal and complies with Islamic Shariah law.
Previous Section «
Next Section »

Back to top of pagetop

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.

You are currently using an old browser which will not be supported by Trustnet after 31/07/2016. To ensure you benefit from all features on the site, please update your browser.   Close