Interest is prohibited under Shariah. You are not allowed to either pay or receive interest as it is considered unjust. For example, a bank following Shariah cannot give interest-based home loan to you. Instead, the bank will purchase the house and rent it to you, and you are required to pay rent to the bank. This rental income received by the bank will further be distributed among the depositors of the bank as a way of sharing profits..
Shariah prohibits you from investing in businesses that earn their income through the sale of alcohol, abusive drugs, pork products, gambling, weapons, and other such products. You are also forbidden to invest in companies that earn most of their income, like interest from others.
As per Shariah, you must pay a certain percentage of your wealth as an act of charity. If we compare it with Tax, it is somewhat similar in the sense that you must share your wealth with others who are less fortunate. It is considered to cleanse and purify the remainder of your wealth.In addition to the above three points, Shariah also governs both risks and returns associated with any financial transaction that must be shared between both parties. No one party must be the only beneficiary.
Following the Shariah principle, you can invest in stocks or mutual funds. However, it can be challenging to select Shariah-compliant stocks. In that case, investing in a Shariah based mutual fund can help. There are Shariah-compliant mutual funds available in India. These funds invest your money in socially responsible businesses based on the principles of Shariah. With a focused investment objective guided by Shariah, these mutual funds can provide capital appreciation, diversification and income distribution. These mutual funds have Shariah indices as their benchmark. An investor should consider the fund details available in the Key Information Memorandum (KIM) and the Scheme Information Document (SID) before investing in Shariah-compliant funds. This can help you know the risk profile, asset allocation, past performance, and other details about the fund.Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
