Mastering Islamic Finance: The Ultimate Guide to Sharia Investment

Before we dive into Sharia Investments, let’s take a moment to appreciate you for choosing to follow the religious rules of Islam in your investing journey. Thus, you are dedicated.

Sharia investment follows the principles of Islamic Laws.

As a Sharia investor, you must follow the rules and choose a more ethical and responsible way to invest. 

But let’s all agree, that this wasn’t an easy decision as you may have faced several hardships trying to curate a Sharia Investment Portfolio/Fund.

Being a Sharia investor, you might compare yourself with your fellow non-Sharia investors and look in awe at the number of avenues they invest in.

You may also think, and be worried that this universe of Sharia investing is small and there aren’t many options in India to invest in.

Well, the answer is both a Yes and a No.

Are there enough halal investment options in India?

Well, the answer is both a Yes and a No.

We can only say that it becomes more important for you as Sharia Investors to find out the best Islamic way to invest money in India.

You should also know whether SIP is halal or haram to your investment journey.

SIP has been one of the effective and systematic ways to invest in the market.

So you need to figure out whether SIP is halal for Sharia investments as well.

Did you know that you can create a customized Sharia Investment Portfolio apart from the regulated investments just by satisfying all the Islamic rules?

Read on to find out more about mastering the Sharia Investment and the best Islamic way to invest money in India.

Most importantly this article also touches upon Sharia Complaint Mutual Funds that you can invest in.

This article can serve as the Ultimate Islamic Finance Guide.

Let’s take a deep dive into how Islamic finance works, its principles, challenges, and the best halal investments available in India today.

Table of Contents:

1. Principles of Sharia Investing: What Makes an Investment Halal?

• Prohibition of Riba (Interest-Based Earnings)
• Prohibition on Investing in Certain Businesses
• Zakat (Wealth Distribution & Social Responsibility)

2. Dissecting the Elements of Challenges Present in Sharia Investing

• Smaller Universe
• Compliant Risk
• Less Regulation

3. Scams in the name of Sharia Investments or Halal funds

4. Islamic or Sharia Investment Portfolio: How to Build a 100% Halal Investment Portfolio in India

• Emergency Fund – What’s the Halal Alternative to Fixed Deposits?
• Short-term Investing for Sharia Investment
• Long-term investing for Islamic Sharia Investment

5. How to Expand Your Halal Investment Portfolio Beyond Mutual Funds?

6. Are there any Halal Investment Options in India?

7. Frequently Asked Questions in Islamic / Shariah-Compliant Investing

8. Bottomline: Why a Financial Planner is Essential for Sharia Investing?

Principles of Sharia Investing: What Makes an Investment Halal?

Understanding these principles will help you discover the best Islamic way to invest money in India.

It will enlighten you on ‘How to invest the Halal way?’

These principles will be the basis for classifying Halal investments in India.

By this, you can also get a gist of whether is SIP allowed in Islam or is SIP haram in Islam.

Or is there anything called halal SIP in India?

Let’s visit the 3 core principles of Sharia Investing, as they are the foundation on which the entire Islamic Financial Plan is to be drafted.

Prohibition of Riba (Interest-Based Earnings)

Interest, in any form, is prohibited in the Sharia Law of Investments.

We aren’t supposed to give or receive any interest, and it is considered unlawful to do so.

This means that any investment earning returns through interest—such as fixed deposits, bonds, and debt funds—is considered haram.

Example of Haram Investments:

• Fixed deposits (FDs)
• Recurring deposits (RDs)
• Government and corporate bonds
• Debt mutual funds 

This again leads to the question of whether is Systematic Investment Plan halal in Sharia Investments.

Halal Alternative:

Instead of earning interest on money, Sharia-compliant investments generate profits through asset ownership, trading, or profit-sharing models.

We will take a look at this in detail in the later sections of the article. 

Prohibition on investing in Certain Businesses

Sharia prohibits you from investing in businesses that are harmful to society or against Islamic principles of Investing.

Industries You CANNOT Invest In:

❌ Alcohol and tobacco

❌ Gambling (Casinos, lottery, betting)

❌ Pork-related businesses

❌ Interest-based financial services (banks, NBFCs, insurance)

❌ Adult entertainment

Halal Investment Options:

Sharia-compliant funds invest in ethical industries such as;

• Technology
• Healthcare
• Manufacturing
• Renewable energy 

Zatak (Wealth Distribution & Social Responsibility)

Islamic Finance encourages fair wealth distribution, As per Sharia Investing Principles, you are required to share a certain % (usually 2.5%) of your profit with charitable causes.

This is said to alleviate poverty as the rich-poor divide is reduced under profit sharing. This ensures that wealth circulates in the economy without exploitation.

Moving Forward let’s dissect the elements of Sharia Investments that will guide you in creating a Sharia Investment Portfolio by selecting Sharia Funds in India.

Dissecting the Elements of Challenges Present in Sharia Investing

• First and the most important aspect of following the Sharia Investing principles is being religiously compliant with your religion’s laws. In this way, you are being ethically right and socially responsible.

• Sharia Investment rules prevent you from investing in companies with high leverages that are less volatile and also have fewer drawdowns. The below picture from Bloomberg shows that the drawdown is comparatively lesser in Islamic funds.

Smaller Universe:

The world of Islamic or Sharia investing is smaller when compared to the conventional investment style.

Unlike conventional investors who can invest in debt funds, FDs, or bonds, Sharia investors must avoid interest-based earnings. This significantly reduces the number of investment choices. 

Due to this style of investing the fund manager who manages the Sharia funds misses out on the diversification in this fund.

Therefore, there is a high possibility of concentration risk in Shariah Investments.

This lack of diversification in the Sharia Investments Portfolio may also mean that they may over-invest in a sector and cause an imbalance.

He/she may not be able to select some stocks in their Sharia Investment Portfolio and may miss out on certain sectors.

So it is not easy for even a pro-investor to select all the best-performing Sharia Complaint Stocks in his portfolio.

As a Sharia-Compliant Investor, you can try to invest in Sharia-compliant Mutual Funds, Stocks, Gold, and ETFs. 

Compliant Risk:

There is also a compliance risk that stocks invested by Sharia-compliant funds may turn non-compliant.

If a company starts earning a significant portion of its revenue from haram activities (like interest-based banking), its compliance status changes.

Regularly monitor and review your investments to ensure continued Sharia compliance. 

In such cases, the fund manager has to exclude these stocks from his portfolio, again causing an imbalance.

Less Regulation:

Unlike countries such as the UAE, Malaysia, and Saudi Arabia, India does not have a full-fledged Islamic banking system. 

Indian Muslims do not have access to a regulated form of Sharia investing framework or an Islamic bank for that matter.

In 2006, Raghuram Rajan, the erstwhile RBI governor had plans to incorporate Islamic banking but the plan never took off.

Instead of relying on Islamic banks, investors can use Sharia-compliant financial institutions such as cooperative credit societies. 

Scams in the name of Sharia Investments or Halal funds

With the advent of technology and the availability of information to everyone, the number of scams associated with Sharia investing/Halal investing has also gone up.

Many scams have been unearthed in the recent past that promise to be the “Best Islamic way to invest money in India”, where people have been lured into investing in Ponzi schemes in the name of Sharia-compliant funds.

They have been compromised by such Ponzi schemes to the tune of about 2000 crores.

Sachar committee which was formed in 2005 to study the socio-economic conditions of Muslims in India observed that Muslim investors are often enticed in the name of religion to invest in such Ponzi schemes.

We can conclude by saying that not all schemes that are portrayed as Sharia Complaint Investment Schemes, are well-regulated and safe to invest in.

An example of such a scam was the Amidant scam in Bengaluru where the promoters promised a return of 12% every month.

This turns out to be ~144% return over one year.

Crazy stuff, isn’t it? How do we stay clear of such scams?

You can protect yourself from such scams by only investing in SEBI-regulated Sharia-compliant mutual funds and ETFs. 

Given all the pros and cons of Sharia-based investing, it may seem that the options to invest are limited.

Yes. Only a Sharia-certified fund can be 100% compliant, and we do not have much at our disposal.

But still, there are some positive aspects to this Sharia Investment.

As mentioned in the beginning we can curate an Investment Portfolio taking only the essence of Sharia and formulate an end-to-end plan for all of our financial goals.

Wondering how? Let’s see how we can create one such Investment Plan.

Islamic or Sharia Investment Portfolio: How to Build a 100% Halal Investment Portfolio in India

Here are certain things that you might have to ponder over as a Sharia Investor:

• What are the best Halal Investment Ideas for your different financial needs?
• How can you meet your financial goals with Islamic financial planning and Islamic Investing?
• How can you create an investment portfolio with 100% Halal Investment Options in India?

Let us see.

Emergency Fund – What’s the Halal Alternative to Fixed Deposits?

When you think of an instrument for the liquidity and safety of the funds FD is the most convenient and easiest way to have it as your emergency fund.

But for Islamic or Sharia Investing, this doesn’t hold well as it is an interest-yielding instrument. 

Therefore, investing in Bank FD shouldn’t be part of Halal investment ideas.

Now let’s see what are the possible Halal Investment Options available to us which are also well regulated and safe to invest in.

The next option we have is Liquid Funds.

Though the returns from liquid funds are not in the form of interest, you may be still wary that these are directly benefited by the interest of the underlying debt and fixed-income securities.

If you agree with the above caveat, you can go in for a liquid fund. But if you are still looking for a Sharia-certified investment you can opt for the Sharia savings accounts offered by some of the Islamic banks in India.

The Taqwa Credit Cooperation Society is one of the very few banks.

Taqwa CCS Ltd was established in 2015, registered under the Credit Cooperative Society Act 1959/60 of Karnataka, with a vision to be the First Islamic Banking Model in India.

You can make a savings account with them for your emergency fund.

So, some of the halal alternatives to Fixed Deposits are:

✅ Sharia-compliant cooperative societies – Example: Taqwa Credit Cooperative Society

✅ Gold savings – A great alternative to interest-based savings accounts 

Short-term Investing for Sharia Investment

For short-term financial goals (1–3 years), Sharia investors need alternatives to debt funds and bonds. 

What can be the best halal short-term investment?

Creating a Short-term Sharia Investment Portfolio is the trickiest part.

In the conventional world, the short-term requirements are taken care of by the debt components. But being Sharia-compliant these are forbidden.

The only other alternative Halal Investment idea is gold bees. Were you amazed as to why this came up? So am I.

These are the only instruments available for us to invest in the short term.

You may refute this by saying that gold is conventional for a longer term and that it is volatile. Yes, you are right about this.

For any short-term instrument, the major criteria are to make our capital appreciate at a decent pace and that it should be highly liquid as and when required.

Of all the other instruments available under Sharia, only gold can satisfy these criteria to some extent.

Please note that this is speculative. Gold may produce lesser or even negative returns in periods of less than 3 years.

So for a 3-5 year timeframe, you can consider gold to be a safer haven and be Sharia compliant.

To gain more insights on Gold Investments, we would recommend you to watch this video: Gold: As an Asset Class – What is the Role of Gold in your Portfolio? — Watch here

Long-term investing for Islamic Sharia Investment

Long-term Sharia investing is comparatively easier than short-term ones by virtue of the funds available.

There are 3 regulated Halal mutual funds in India available for Sharia investment. These are Sharia Certified Halal Mutual Funds available in India.

List of Mutual Funds in India

• Tata Ethical Fund and Taurus Ethical Funds are 2 funds that are suitable for long-term Islamic investors for capital appreciation. These are very popular Shariah complaint Mutual Funds in India.

• Nippon India ETF Sharia BeEs (formerly Reliance ETF Sharia BeES) is the only known Sharia-compliant ETF available in India. This mimics the N50 Sharia index fund and has weights proportionate to the same.  This is the only Halal Index Mutual Fund in India.

Above is the complete list of Halal Mutual Funds in India which are Islamic investment options.

But do you think these 3 funds are sufficient enough to give you the required Sharia Portfolio diversification and overall Islamic wealth creation?

We will try to answer this by taking cues from the Sharia principles and devising a plan.

How to Expand Your Halal Investment Portfolio Beyond Mutual Funds? 

Let’s make it simple.

Consider the top stocks that are traded in India and are part of the Nifty 50 index.

We can take cues from the Nifty 50 index, which represents India’s top companies. But not all Nifty 50 stocks align with Sharia principles.

Stocks to Avoid (Haram Sectors):

❌ Banking & Financial Services (HDFC, ICICI Bank) – Earn interest-based revenue

❌ FMCG companies (ITC) – Involved in tobacco and non-halal products

Sectors You Can Invest In (Halal Sectors):

✔ Technology – TCS, Infosys, Wipro
✔ Pharma – Cipla, Divi’s Labs, Dr. Reddy’s
✔ Metals – Tata Steel, Hindalco
✔ Automobile – Maruti Suzuki, M&M 

By implementing this methodology, you can easily identify and invest Sharia Complaint Stocks.

As it is unlawful to invest in interest-generating assets we rule out banking stocks.

We also rule out FMCG sectors like ITC as they have certain products that do not adhere to the Islamic Investing law.

After all, these are filtered we have sectors like Tech, Pharma, metals, Auto, and others sectors.

You can simply invest in these thematic funds and be Sharia-compliant.

By investing in these specific sectors rather than entire indices, you can ensure your Investment Portfolio remains Sharia-compliant. 

Are there any Halal Investment Options in India?

Yes, apart from mutual funds, there are two more halal investment avenues you should consider:

The other Halal Investment Options in India are none other than InVITs and REITs.

There are also InVITs and REITs that are Sharia certified which you can consider.

We shall apply the Sharia Investing principles here and make a Sharia complaint in InVITs and REITs investments. 

1. REITs (Real Estate Investment Trusts) – A Sharia-Friendly Option?

REITs allow investors to own a portion of real estate properties without buying physical land. But are they halal? That depends.

✅ A REIT is halal if:

✔ It does not invest in properties involved in haram activities (casinos, alcohol,
etc.)

✔ It does not generate income from interest-bearing financial institutions

What to check before investing in a REIT?

• Look at the type of tenants renting the property
• Ensure that no haram businesses operate on the premises 

For instance, check the underlying business that is undertaken on the premises.

If alcohol or pork is not served on the premises of the REIT and if the REIT doesn’t house any interest-bearing asset, then the REIT can be considered to be Sharia-compliant.

2. InVITs (Infrastructure Investment Trusts) – Can They Be Halal?

InVITs allow investors to pool money into infrastructure projects like roads, bridges, and power plants. But again, not all InVITs are Sharia-compliant.

✅ A halal InVIT must:

✔ Not be highly leveraged with debt

✔ Invest in ethical infrastructure projects

What to check before investing in an InVIT?

• Ensure it does not generate revenue from interest-bearing loans
• Avoid those with high debt ratios 

If isn’t then it can be considered Sharia Compliant investing for the longer term.

Do note that the liquidity is lesser in the case of REITs and InVITs as they can be only sold in the secondary markets.

Frequently Asked Questions in Islamic / Shariah-Compliant Investing

1. Is SIP allowed in Islamic Investing?

Yes. SIP is allowed in Islamic investing. SIP is just a strategy to invest in.

2. Is SIP(Systematic Investment Plan) Halal or Haram?

Both! You can do SIP in investments that satisfy halal conditions.

3. Is ELSS Halal?

No. ELSS funds are like flexi cap funds. They can invest in any sector. They may choose to invest in stocks which are not satisfying the Shariah investing principle.

4. List of Halal Mutual Funds in India?

Tata Ethical Fund and Taurus Ethical Funds are 2 funds that are suitable for long-term Islamic investors for capital appreciation.

5. What is Halal Investing?

Halal investing refers to investment practices that comply with Islamic law (Sharia). This means avoiding investments in businesses that engage in prohibited (haram) activities, such as alcohol, gambling, and interest-based financial services.

6. How Can I Determine if a Stock is Sharia-Compliant?

To assess if a stock is Sharia-compliant, consider the following:

• Business Activities: Ensure the company does not engage in haram industries like alcohol, gambling, or interest-based finance.
• Financial Ratios: Analyse the company’s financials to ensure that debt levels and interest income are within acceptable limits as defined by Sharia standards.

7. Is Real Estate Investment Considered Halal?

Investing in real estate is generally considered halal, provided the properties are not used for haram activities (e.g., casinos, bars). It’s essential to ensure that the investment does not involve interest-based financing and that all contractual elements comply with Sharia principles.

8. Can Non-Muslims Invest in Sharia-Compliant Funds?

Absolutely. Sharia-compliant funds are open to all investors, regardless of religious affiliation. Many non-Muslims are attracted to these funds due to their ethical investment principles and the rigorous screening processes that often lead to investments in financially prudent companies.

9. How Do Islamic Banks Handle Savings Accounts Without Paying Interest?

Islamic banks offer savings accounts based on profit-sharing models. Instead of paying a predetermined interest rate, the bank invests the deposited funds in Sharia-compliant ventures. The profits (or losses) from these investments are then shared with the account holders, ensuring compliance with the prohibition of interest. 

Bottomline: Why a Financial Planner is Essential for Sharia Investing?

Just like all other investing styles, Sharia investing has its share of pros and cons.

If you are planning to invest only in the 100% certified Sharia complaint funds then the options are limited.

However, if we understand the Core Principles of Sharia Investing and tweak as we have discussed, our investment styles to match, then we can avoid Haram and there are many more avenues open up for investing.

That said, navigating Sharia-compliant investments can be complex.

Understanding financial ratios, screening halal stocks, and ensuring Sharia compliance in funds, ETFs, REITs, and InVITs require detailed knowledge and expertise.

This is where a Qualified Financial Planner with Expertise in Islamic Finance can be extremely valuable. A good financial planner can:

✅ Help you create a diversified Sharia-compliant portfolio

✅ Ensure your investments align with Islamic principles

✅ Provide insights on tax efficiency and liquidity management

✅ Continuously monitor your investments to maintain compliance

If you want to build long-term, halal wealth while avoiding mistakes, consulting a Sharia-compliant financial planner is a smart step toward financial success.

As informed investors, we should weigh all the available options and make the right decision that aligns with our faith, ethics, and financial goals.

Happy Investing!