Halal Index Funds
IS THERE A HALAL INDEX FUND?
Yes, there are many options these days for those looking for halal index funds.
Index funds have long been known as one of the best and easiest ways to invest your money. The increase in the availability of halal index funds, that is funds that comply with Islamic Sharia rules, means that there is an even greater opportunity to maximise your investments without breaching Islamic finance principles.
Halal index funds enable investors to invest in a wider selection of stocks all within one fund.
WHAT ARE INDEX FUNDS?
An index fund is essentially a fund that follows what is known as a benchmark index, for example, Nasdaq 100, FTSE 100, and the S&P 500. Index funds are a portfolio of stocks and bonds.
Index funds are generally regarded as a passive form of investing. What this means is that investors who invest in index funds do not have to actively manage their investments.
The index fund will aim to mirror the index they track, they do not need to be actively and constantly managed.
Exchanged traded funds (ETFs) are those funds that are traded on exchanges and usually ETFs will track a specific index. EFTs offer investors a basket or bundle of assets that can be traded. The result is that the portfolio is diversified and the risk is deemed to be low, especially in times of economic growth.
Index funds are popular with all kinds of investors from angel investors, stock investors, new investors, and those looking for responsible investment options.
Difference Between Mutual Funds And Index Funds
The main difference between mutual funds and index funds is that mutual funds need a great deal more active management by fund managers. These fund managers actively choose the investments and manage the mutual fund and this leads to increased management fees and costs.
Before making any kind of investment in index funds you should make some inquiries about the fund, read online information from the relevant website and try and look into the methodology the fund uses (this includes yield, capitalisation, and price).
HOW DO INDEX FUNDS WORK?
Index funds work by investors investing their money in to an index fund that has been created. The money is then used to invest into the companies that comprise the particular index fund chosen. This means investors are able to diversify their portfolios and invest in companies they want to.
For example, if an investor invests money in the S&P 500. This index fund essentially tracks the performance of 500 of the largest companies in the USA. The S&P 500 is one of the largest and most popular index funds on the market.
Investing in companies via index funds means that investors' money is linked to, and tied up with, the performance of the companies within the fund. Many of these index funds have a very wide range of companies within the fund.
INDEX FUNDS WHAT ARE THE RISKS?
As many of the most popular index funds are diverse, this means they are less risky for investors. The reason the risk is lowered with index funds is that there are usually many companies within the fund, so all the investment is not tied up with the performance of one company.
Index funds are known for offering what is considered to be a broad market exposure for investors, with very low operating costs and risk. Index funds are popular with people who want to use the fund as a pension and plan for retirement.
Index funds are normally managed by a fund manager whose employment is based on ensuring that the fund is managed and tracked properly.
Sharia Principles Relating To Index Funds
The Sharia rules that relate to investment funds are the same rules that apply across all financial transactions. Understanding these halal investing principles is essential before choosing where to put your money.
They include the following:
- There should be no element of interest (riba)
- The investments should be ethical and should enhance communities and society in keeping with the social justice element of Islamic finance
- There should be no element of speculation or gambling (maisir)
- Both parties in the transaction should share the risks and profits
- There should be no transactions involving uncertainty (gharar)
- There must be asset backing - this means that every financial investment and transaction must relate to a tangible asset
- The industries, business, and companies within the fund should not be deemed to be impermissible in Islam
WHAT INDEX FUND IS HALAL?
The aim of halal index funds is to create long term appreciation of the investment funds via a diversified portfolio. Revenue is generated if the portfolio increases in value.
This portfolio is securities and investments are compliant with Islamic finance investment principles as laid down by Sharia laws.
Two of the largest index funds are the HSBC Islamic Global Equity Index Fund (halal) and the Vanguard FTSE 100 Index Fund. In the United States, the Dow Jones Industrial Average is one of the most popular funds to invest in. However, there are other index funds that meet the Sharia principles of halal investment. The numbers in the name often refer to the number of companies included within the index. For example, the FTSE 100 includes the largest 250 companies that are currently listed on the London Stock Exchange.
Before investing, always make sure you have done your due diligence and that the index fund you are investing in has been certified as compliant with Sharia rules.
For Muslims, the main incentive for investing in halal index funds is that they comply with Islamic finance rules and regulations. Any stock or bond within a halal index fund needs to be compliant with Sharia rules relating to investing.
ADVANTAGES OF INVESTING IN HALAL INDEX FUNDS - IS INVESTING IN A FUND HALAL?
One of the main advantages for any individual investing in a halal index fund or product is knowing that you will be investing your money in funds that comply with Sharia principles. Halal index funds also take care to ensure that the money is not invested in industries prohibited by Islamic finance principles (such as the gambling, alcohol, and porn industries).
For investors who want to invest in an ethical way that does not adversely impact society, then halal index funds offer the opportunity to do that. The relevance of halal index funds has grown significantly in recent years with the increase in demand for Sharia compliant and ethical investment options.
There is a great deal of global movement towards more responsible investing and halal index funds meet the criteria for ethical investing.
In the United Kingdom, index funds are regulated by the Financial Conduct Authority.
Considerations For Investors Wanting To Invest In Halal Index Funds
Investment in any kind of fund comes with its own risks. You should always seek to do as much research as possible before you invest.
Some of the key risks relating to halal index funds include:
- Risk of the investment value going down
- Exchange rate risks - if the economy and the markets are volatile then the exchange rates could fluctuate and affect your investment gains
- Tracking risks - whilst index funds will track the index, you should expect to see occasional differences in the gains
- Operational risks - as with any fund, halal index funds could be subject to operational and compliance risks which could affect any profit or return generated
LOOKING FOR THE RIGHT HALAL INDEX FUND - IS THE S&P FUND HALAL?
In addition to the points raised above, if you want to invest in a halal index fund then you should look specifically for:
- Confirmation/documentation that the index fund has been certified as being compliant with Sharia rules
- The scope for diversification - the greater the diversification the lower your overall risk
- Fund fees - check what fees your investment will incur
- Foreign companies - looking at companies abroad is a great way of diversifying your portfolio and finding halal investment funds
- Minimum investment levels - check to see if there is a minimum investment level required for the fund you are interested in. Many halal index funds are accessible and have reasonable charges for every level of investor
- Information - check what information is available on the index funds you are interested in. If you have any questions find an expert who can help you with your queries
As halal index funds grow in popularity across the globe it is important to find the fund that works best for you. Currently, Apple is deemed to be one of the largest holdings in the S&P Shariah Index.
SAVING VERSUS INVESTING IN INDEX FUNDS?
Whilst is it always a good idea to have savings, if you are comfortable with taking small risks and want to diversify your investment portfolio, then halal index funds are the way forward.
If you are risk averse and do not want to deal with any market fluctuations, then it is probably best for you to maximise your savings. However, in the current economy savings are not the best way to use your money. Also, for Muslims who are not permitted to make use of high interest savings accounts, looking into index funds is a good way of earning revenue from the money they have.
Halal index funds are a great way for beginners to invest in the stock market. Index funds enable investors to own a share in a company for relatively low cost.
The company that manages the fund will do all the running around and hard work so you do not have to.
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Waqf is an ongoing, sustainable, charitable donation and has been used throughout Islamic history to benefit and support communities, and aid community development. Islamically, waqf is a mechanism through which the condition of society can be improved. Waqf refers to an endowment made to a charitable, educational or religious cause.
It is a voluntary action that the whole community can benefit from, for example, the building of a university, research centre or hospital.
WAQF - WHAT DOES IT MEAN?
The Arabic meaning of waqf means 'restriction'. This is based on the principle that all property essentially belongs to Allah. So, whilst a Muslim may donate to a charity for community development, the donation is not owned by the Muslim but by Allah.
For example, if you donate some land or an asset for the purpose of community development, then the community will reap the benefits. The donation releases an ongoing community benefit that supports future generations. A famous example of waqf is the Al Azhar Mosque and University in Cairo, Egypt. This University was founded as waqf in 1908, with funds donated by wealthy Egyptians.
HOW DOES WAQF WORK?
Waqf involves donating a fixed asset which in turn provides a financial return.
Waqf is based on the principle that you can donate an asset that can then continue to provide a charitable service for the foreseeable future. The waqf project goes on to support others in the community through various activities and services.
This is how waqf works:
- Individual donates an asset to a waqf project.
- The donations are collated and invested in a Sharia compliant way.
- Any profits and returns on the investments are used to support charitable organizations such as education, relief of poverty, providing healthcare services and emergency solutions.
- Some profits are reinvested in a Sharia compliant manner.
The outcome is that your donation should keep going for a number of years, benefiting humans for generations. The incentive for Muslims wanting to donate to a waqf is that the donation is considered to be an ongoing charitable endowment that benefits others for many years.
History Of Waqf
Although waqf is not explicitly prescribed in the Quran like charity is, it is considered to be comparable to sadaqah. Waqf investments are deemed to be a crucial part of Islam as the Prophet (SAW) stated that:
"When a person dies, all their deeds end except three: a continuing charity, beneficial knowledge, and a child who prays for them"
Waqf investments have an important continuing charity element.
Waqf As A Social Finance Institution
Many Muslim majority countries in the world are still developing and income-poor. There is a lack of availability of private sector investment businesses and options. Waqf can be considered a social finance institution that can fill the gaps in development spending. Waqf provides an avenue for the effective utilisation of perpetual social savings.
With transnational waqf investments and support programmes, there is potential for philanthropic Muslims to support the development of communities across the world.
When viewed through an Islamic redistribution framework, it is clear that waqf harnesses selfless charitable giving in a way that is effective and impactful. Targeting social segments within society and aiming for long term improvement brings benefits to donors and society as a whole.
Donating assets for permanent societal benefit facilitates flexibility and stabilisation for deprived and needy communities. Waqf essentially transforms social capital into social infrastructure, complementing zakat and sadaqah donations.
Sourcing Sharia compliant waqf investments and donations online can be difficult, so you must ensure that you undertake the due diligence required.
Sharia-compliant finance operates within the Islamic finance financial model. What this means is that any financial product or service must adhere to Islamic rules relating to financial transactions.
The increasing popularity of Sharia-compliant finance is being driven by the growth in the global Islamic finance industry. However, many businesses and individuals are looking to Sharia-compliant finance to provide them with ethically based options and solutions. Ethical investors and the growing trend for socially responsible investing means Sharia compliant services are aligning with the values of many people across the world.
Sharia-Compliant Finance
Sharia-compliant finance must have the following qualities:
- Aligns with Islamic values
- Prohibition on interest/riba
- Ethics and morality screening
- Social responsibility
- Risk management
- Profit and loss sharing
- Ongoing monitoring and compliance
- Asset backed finance
- Avoiding speculation and ambiguity
Promoting Inclusion
Sharia-compliant finance is a great draw for ethical investors in the market looking to invest their money in ethical enterprises that promote individual inclusion and diversity. By providing equitable access to financial services, Sharia-compliant finance serves underprivileged communities who may not previously had access to products and services.
The focus on building inclusion and equity through transparency, information, and sharing of profits enables Sharia-compliant finance to promote inclusion.
There are several ways in which Sharia-compliant finance promotes inclusion.
- Prohibition of interest: the charging or receiving of interest is seen in Islam as an exploitative practice that is unjust and unfair.
- Avoiding speculation: keeping transactions transparent and equal makes them more inclusive.
- Ethical investment screening: screening for industries such as gambling and alcohol means that more focus is placed on environmental, social, and corporate governance.
- Asset backed finance: having transactions backed by assets leads to more clarity and equity between all parties.
- Risk sharing: this leads to greater inclusion as it removes the respective power of each party when coming into the financial deal. It also means that payments owing to the parties are fair and proportionate.
- Socially responsible investing: the onus on being socially responsible when investing or managing a portfolio places a responsibility on the investor to be conscious of working with marginalised groups.
- Sustainability: having a future focus on long term goals is a key element of Islamic finance.
- Fairness in contracts: Islamic finance emphasises the importance of having fair contracts and contract terms. Parties to a contract should act with integrity, honesty, and mutual consent.
Microfinance In Islamic Finance
Islamic finance recognises the importance of supporting small and medium businesses. Investment in these sectors and industries is encouraged.
Sharia-compliant finance understands that microfinance for small businesses is imperative for growth and sustainability. Often, small businesses can struggle to secure funding and capital. Islamic microfinance offers SMEs a lifeline with Sharia compliant finance solutions that are tailored to the business needs.
For investors, it means they can invest ethically, enabling entrepreneurs to access capital for business growth.
Risk And Profit Sharing
Risk and profit sharing is a key element of Islamic finance. What it means in principle is that partnership models such as Mudarabah and Musharakah are encouraged.
These partnerships enable entrepreneurs and financiers to agree on the terms of any profit sharing in a fair and transparent way.
Community Development Initiatives
Islamic finance encourages community development initiatives through mechanisms that align with Islam. The central principles of social responsibility and ethical investing mean that investors are required to act in a philanthropic way for the greater good of society. The outcome is that society benefits from the actions of the individual.
Sharia-compliant investments are directed towards the type of fund and project that positively impacts society. Investors looking for Sharia compliant investors prioritise investments in sectors that require funding such as healthcare, education, renewable energy, housing, and poverty alleviation.
These sectors have seen huge growth in recent years, so investing in them is often a win for the socially conscious investor and the initiative.
Staying Stable In Volatile Markets
Sharia compliant finance has demonstrated resilience and stability in volatile markets. This is due to its core principles of risk sharing, asset backed finance, and avoiding interest. Ethical investors are not looking for a quick and easy return, instead they want to invest in a stable and ethical sector.
As changes in interest rates affected the global markets in recent years, the Islamic finance investment market remained relatively stable as it is not dependent on interest backed lending or borrowing.
The value of the assets the finance is backed against provides some stability when the market becomes unpredictable.
Global Growth
Islam encourages a long term approach when it comes to investments. The focus is not on immediate profits, but long term sustainability and societal benefit. The principles of sabr (patience) and fairness in Islam mean that ethical investors investing using a Sharia-compliant framework are not always looking for an immediate return on investment. The aim is long term benefits and stable returns.
As the Islamic finance industry continues to grow, so too do the Sharia compliant finance options. Ethical investors from all backgrounds are pushing the drive for ethical and socially responsible investments.
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