Shariah Compliant Mutual Funds in India: Are they really Islamic?

Update (30-Dec-2016): Adding Fund Performance section.

Most people (including Muslims), are not really aware of Mutual Funds (MF). Many literate people might have heard it but few would have invested after some investigation in the fund.

I am not discussing MF details; there are plenty of articles out there to explain it. Also a general islamic classification of MF's is discussed here: Islamic Shariah classification of Mutual Funds in India
In this article we only discuss the halal status of Mutual Funds who declare themselves as Shariah based.

Summary

For those who need quick answers, here is a list of shariah compliant MF's in India:

1. Tauras Ethical Fund: Much better than other MF but Not 100%. 
2. Tata Ethical Fund: Likely to be valid.
3. SBI Shariah Equity Fund: Never launched.
4. Goldman Sachs CNX Nifty Shariah BeES Equity Fund; It self declares not 100% shariah based

There are only 2 Shariah based Mutual funds in India (note Goldman Sachs is ETF, not MF). Now we discuss in detail about them.

What makes them Shariah based

Most primary thing that makes them Shariah based is they follow a Shariah stock index S&P Shariah or CNX Shariah). What this index is and what stocks it contains will be a separate discussion. Some of its characteristic:

1. Investing in islamically legal business companies.
2. Debt is not high.
3. Interest income is very low.

Other characteristic:

1. Long term investment.
2. No short-selling or day trading which is same as betting.
3. No liquid investment in interest bearing components.
4. No lending of MF assets.
5. No investment in other mutual funds.
6. No investment in any derivatives.

Fund Details

These are equity funds but no tax saving. There is no entry load; no exit load if withdrawn after a year; trail commission 1.5 to 2.5%.

Performance is good enough for long term.

Tauras Ethical Fund: 

It invest based on stocks as present in S&P BSE 500 Shariah index. If you consider the S&P Shariah index to be 100% halal, then this fund will be fine. However, the index definitely contains stocks of companies that have upto 30% debt or 5% interest income and the fund does nothing about it. All this is clearly mentioned in the Scheme Information Document. And this is the problem with the fund.

Tata Ethical Fund:

This fund invests in stocks based on the CNX Shariah 500 Index. As a result, it suffers from the same problem as that of Tauras Ethical Fund. However, it does one thing important: Purification.

Once the Mutual Fund has earned profit, it calculates any non-legal income from Interest and donates to charity and you only get the actual profit.

Because of this am tempted to say that this could be the only halal MF. Only thing am not sure how they deal with stocks of companies that have taken loans.

Fund Performance:

It is important to also see if your investment is giving your profit or loss. Else you would be better off not investing at all.
Performance of all 3 Funds is below average compared to other Equity Funds.
They are not making loss but the profit is very small about 10-13% over 3 years. This obviously is far less than inflation. But this is the state of most halal investments; the returns are very less.
Perhaps this is the test of Allah, most haram investments will give excellent returns.

Concluding Notes

• If you are determined to invest in MF then Tata Ethical Fund can be considered.
• SBI Shariah fund that was to be launched with tax saving but did not see the light of the day.
• Goldman Sachs CNX Nifty Shariah Index Exchange Traded Fund itself truthfully declares that although they follow a Shariah based stock index they are not completely shariah compliant. This can be found in its Scheme Information Document.