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Shariah-compliant mutual funds draw Jain investors

Those who follow Shariah principles (trusts, companies and individuals) only account for 35% to 40% of the assets under management

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Jains and other communities are dominant investors in Shariah-compliant mutual funds such as Tata Ethical Fund and Taurus Ethical Fund, the only two funds in the country that provide medium- to long-term capital gains by investing in Shariah-compliant equity and equity-related instruments of companies.

Though crafted on the Shariah principles, these two funds are also in sync with the beliefs of and ethics practised by the Jain community. The funds screen the companies before they invest in, according to the Shariah laws which ban investing into companies in the business of tobacco, alcohol and gambling, similar to the socially responsible funds.

The funds only invest in companies that are from Shariah-compliant universe of stocks. It also means that these funds cannot invest in companies with a debt-equity ratio of more than 30% (call them highly leveraged companies in banking parlance) and also companies that report more than 10% of other income in their profit. This results in a universe of companies with good balance-sheets and whose profit is derived mainly from their core business.

Such investment products, regulated by the India's market regulator Securities and Exchange Board of India (Sebi), are based on Islamic equity indexes, with the funds benchmarked to the S&P BSE 500 Shariah Index launched in May 2013.

A senior official from Taurus Ethical Fund said, "A majority of investors into these funds are Jains who also believe in investing in ethical companies. It has nothing to do with the religion. It is just based on some religious principles. These principles do not spread sectarianism or any other communal feeling in our experience."

Why are these funds accepted by other communities?
Arvind Sethi, managing director and chief executive officer, Tata Asset Management, said, "While the investment universe of this fund is along Shariah principles, the fund was conceived and has found acceptance across communities because of its compelling investment thesis. This fund is also gazetted as public security in Maharashtra and therefore eligible for investment by all religious and charitable trusts. Those who follow Shariah principles (trusts, companies and individuals) only account for 35% to 40% of the assets under management of the fund, the balance is coming from other communities including the Jains.

Are there any other such funds in the offing?
SBI Funds Management, a joint venture between State Bank of India (SBI) and French asset manager Amundi, was to launch a Shariah-compliant fund on December 1. But it got postponed with reservations raised over a government-owned institution launching a community-based product.

Are investors flocking to such funds?
Not really. Such funds have a steady growth of well-informed investors who are concerned how they make their money. But the fact is that the two ethical funds together have total assets under management of just Rs 500 crore which is only a small portion of the investments into the mutual fund industry that manages assets of over Rs 10,00,000 crore. "Considering that almost all diversified equity mutual funds have 25% to 30% exposure to banking and finance an ethical fund makes sense as a contrarian play in an investor's portfolio," Sethi said.

How are the returns?
The returns have been handsome. According to the fact-sheet of Tata Ethical Fund, the fund has since its inception returned 17.81% versus the Nifty returns of 11.47% as on September-end. In other words, if the investor had put in Rs 10,000 in this fund, it would have grown 20 times to Rs 202,870 versus seven times to Rs 73,456 if invested in the Nifty stocks. Funds that invest in socially responsible investing themes are gaining popularity overseas. Even in Islamic countries, only a small percentage of investments are made along religious lines. "But there is a choice," adds Sethi.

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