Sharia Compliant Investments

Q:What is Sharia Compliant Investments
A: An investment portfolio can be created through a process of screening certain type of stocks known as "Sin Stocks" to comply with the standards, guidelines and principles of Sharia laws and certified by an Islamic institution. There are many stocks that can be screened out, but mainly the following types of stocks are not permitted in a portfolio:

  • Alcohol
  • Adult Entertainment
  • Defense
  • Gambling
  • Pork Products
  • Tobacco
  • Cinema/Broadcasting
  • Conventional Financial Services
  • Conventional Insurance Companies
  • Hotels
  • Interest Income
  • Music

Q: Is there a minimum amount needed in order to start investing?
A: Yes. Most investment managers set a minimum amount required by them. Generally $100,000 is the minimum amount to start with for these kind of portfolios.

Q: What are Sharia guidelines used to screen global equities?
A: The main guideline is to screen "sin stocks" as mentioned earlier. It does not matter if the stock is domestic or foreign. Any security or stock that is traded in the US market must be registered at one of the American exchanges so that they can be monitored here by SEC. Managers can then easily detect if they belong to any of the lists described above.

Q: How do you ensure Sharia Compliance?
A: The investment platform manager has the responsibility to make sure that the investment portfolio is compliant with the Sharia Laws, guidelines and principles. There is a certification process that ensures that the portfolio is Sharia compliant according to the standards set by an Islamic Institution.

Q: What's the difference between Sharia Portfolio and a mutual fund?
A: Here are the main differences:
There are a number of differences between Sharia Compliant investment portfolio and mutual funds. Sharia Compliant Portfolio is managed on an institutional level while a mutual fund is marketed on a retail level. Investment portfolio is actively managed while mutual fund is a passive investment for clients. Other difference is the diversification. Mutual fund has a narrow focus on investment objective by design and can not be well diversified. An actively managed portfolio by design is well diversified. Sharia Portfolio is continuously monitored by professional money managers and they take action whenever necessary. On the other hand, client has to make decision if they want to remain with the particular mutual fund in the event of market volatility. Tax management is another factor that is very critical as the overall net return of the portfolio after taxes can be dramatically improved, if the portfolio is tax managed. The investor has no such opportunity in tax management in mutual fund. Finally the fees and expenses between managed portfolio and mutual funds are completely different.

Q: Can I choose some of my own stocks to add to the portfolio?
A: No. The money managers have the discretionary authority to pick and choose a specific stock or security. Client can not pick, add or omit any stock or security within the portfolio.

Q: How long has Sharia Portfolio been around?
A: Pretty long time. However, it was in a rudimentary form even few decades ago. But now there are many professionally managed platforms that offer this service to cater to the Muslim community.