Shariah-Compliant Mutual Funds in India: What They Are and How They Work

What Makes a Fund Shariah-Compliant?

Shariah-compliant funds follow Islamic finance principles. Under Shariah law, -Interest or Riba is prohibited, -Excessive uncertainty or Gharar is avoided, -Speculation or Maisir is not permitted.

• Investments in alcohol, tobacco, gambling, pork, weapons and conventional banking are excluded. The screening is not at surface but digs to the core. Funds cannot invest in companies whose total debt exceeds one-fourth of their total assets. Since completely avoiding interest income at a portfolio level is practically impossible, companies with interest income up to 3 to 5 percent of total income are allowed. Any unavoidable or non-compliant income is donated to charity before profits are distributed. An independent panel of Islamic scholars reviews and certifies the fund's portfolio for continuous compliance. This Shariah board is a governance requirement, not a marketing label. Because of these filters, banks, NBFCs, insurance companies, alcohol producers and tobacco companies, which form 30 to 35 percent of the Nifty 50 are completely absent. Technology, healthcare, energy and consumer goods dominate instead.

Are These Funds a Recognised SEBI Category?

No. Shariah-compliant funds are not a separately defined category under SEBI's mutual fund categorisation circular of October 2017. They are classified under the broader thematic or sectoral equity fund category. They are fully regulated under SEBI (Mutual Funds) Regulations, 1996 and AMFI classifies them as thematic equity funds. The Shariah compliance layer is governed by each fund house's independently empanelled advisory board.

Funds Available in India

There are currently four funds in this category.

Source - AMFI India, Groww, INDmoney. Returns as of early 2026. Past performance is not indicative of future returns.

Tata Ethical Fund, launched in May 1996, has delivered a CAGR of 15.1% since inception. Return for 2025 was -1.3%, 2024 was 13.2% and 2023 was 26.7%. Minimum SIP is ₹100 and minimum lumpsum is ₹5,000. Taurus Ethical Fund has an AUM of ₹365 crore as of February 2026 and has delivered a CAGR of 14.70% since inception. Nippon India ETF Nifty 50 Shariah BeES is the only exchange-traded option and requires a demat account. Quantum Ethical Fund, launched in December 2024, is the newest entrant with limited performance history.

How Shariah Funds Compare

How to Invest

The process is identical to any other mutual fund. Complete KYC through CAMS or KFintech, this is a one-time requirement covering all mutual funds. For active funds like Tata Ethical and Taurus Ethical, invest directly through the AMC website or platforms like Upstox. SIPs are available from ₹100 to ₹500 per month depending on the scheme. For the Nippon India ETF, you need a demat and trading account since it trades on NSE like a stock.

Who Should and Should Not Invest

These funds suit faith-based investors who want equity participation consistent with Islamic principles, investors who prefer low-debt companies as a portfolio discipline and those who want an ESG-adjacent approach without financial sector exposure. They are not suited for investors who need full market diversification including financial sector stocks, those seeking fixed income alternatives since no Shariah-compliant debt instruments are currently available in India or investors who want maximum exposure to the Nifty 50 or Sensex in their entirety.

Associated Risks

Sector concentration is the primary risk. Zero exposure to banks and NBFCs means the portfolio behaves very differently from broad market indices. In years when financial stocks lead, Shariah funds will likely underperform. The Nippon ETF carries tracking error risk due to its small AUM of ₹35 crore. With only four funds available, investor choice is significantly limited compared to mainstream categories. Smaller AUM in some funds can also affect liquidity.

Taxation

Shariah-compliant funds are not ELSS funds and offer no Section 80C benefit. They are taxed exactly like regular equity mutual funds. Short-term capital gains on holdings under one year are taxed at 20 percent. Long-term capital gains above ₹1.25 lakh on holdings over one year are taxed at 12.5 percent.

Frequently Asked Questionss

1) Are Shariah mutual funds the same as halal mutual funds?

Yes. Both terms refer to the same category of funds that follow Islamic investment principles.

2) Can I do a SIP in Shariah mutual funds?

Yes. SIPs are available in all active funds in this category starting from ₹100 per month.

3) Do Shariah funds invest in banks or NBFCs?

No. Conventional financial institutions are excluded because their business model is based on interest.

4) Are Shariah funds tax-free?

No. They are taxed like regular equity mutual funds under Indian tax law.

5) Who can invest in Shariah mutual funds?

Any investor regardless of religion. For Muslim investors they provide faith-consistent equity participation. For others they function like an ethical or ESG-aligned investment.