Shariah Compliant ULIP / Insurance / Pension Funds in India: Are they really Islamic?

I never felt the need to write an article related to ULIP or Insurance/ Pension Funds being Islamic. I thought it was clear. But it seems there have been some funds launched with the ethical/pure tag and labelling them shariah compliant.

This article is specific to Shariah based Insurance funds. For other insurance discussion, please refer these posts:
Is Life Insurance Halal in India
Is LIC policy Halal or Haram


Let me list all these fund first:

1. Bajaj Allianz Pure Stock Fund
2. Bajaj Allianz Pure Equity Fund
3. Bajaj Allianz Pure Stock Pension Plan
4. Tata AIA Life Select Equity Fund
5. Tata AIA Life Future Select Equity Fund

Bajaj Allianz Funds:

Straight from Bajaj Allianz policy document, we get this:

Pure Stock Fund: (SFIN: ULIF02721/07/06PURESTKFUN116) 

The investment objective of this fund is to specifically exclude companies dealing in gambling, contests, liquor, entertainment (films, TV etc.), hotels, banks and financial institutions. 

Portfolio Allocation: 

Equity & Equity Related Instruments: Not less than 60% 

Government treasury bills (Non-interest bearing): Not more than 40%

The equity investment is in non-haram sectors. But the stocks themselves either take interest or give interest; so nothing is mentioned about it.

Also as can be seen from the last line it can invest up to 40% in non-equity. Note that there is no such things as non-interest bearing Government Treasury bills.

Actually the word interest is hidden in case of Government Treasury bills and in many places it is written that they are non-interest bearing.

From the RBI docs, we have the definition:

a. Treasury Bills (T-bills)

1.2 Treasury bills or T-bills, which are money market instruments, are short term debt instruments issued by the Government of India and are presently issued in three tenors, namely, 91 day, 182 day and 364 day. Treasury bills are zero coupon securities and pay no interest. They are issued at a discount and redeemed at the face value at maturity. The return to the investors is the difference between the maturity value or the face value (that is Rs.100) and the issue price 

You will find it mentions "pay no interest". However those who know a little finance should be alarmed by 2 words used in the definition "money market" and "debt instrument". These 2 terms mean pure interest based investments. Let me explain:

For example, a 384 day Treasury bill of Rs.100/- (face value) may be issued at say Rs. 93, that is, at a discount of say, Rs.7 and would be redeemed at the face value of Rs.100/-.

So what it means that you invest Rs. 93 and after 384 days government will return you Rs. 100. You make a profit of Rs. 7 but that Rs. 7 is not profit as these people make you believe. That Rs. 7 is the interest the government pays you (approximately 7% interest rate for a year)

You can google for the Bajaj Allianz Pure Stock Fund and open MorningStar website. It can be seen that 

76% is invested in stocks

16% in bonds (pure interest)

7% in cash (may be in bank with interest or may not be - no details)

I am not aware if they are cleaning these profits. (If they are then there is some hope)

I don't thing I need to analyze any of the other Bajaj funds since it is clear how the investment is done.

Tata AIA:

In this cases things seem better. Investment pattern seems simple:

80% in equities

20% in cash and bank (non-interest account)

So this is definitely better. From MorningStar website it can be seen less than 2% is in cash; remaining all is in stocks. Stocks avoid all haram sectors. But the stocks do have some interest taking and some interest giving components themselves. Not sure if the Tata ULIP are cleaning this part similar to the cleaning done in Tata Ethical Mutual Fund.

Save Tax from donations (Zakat, Sadaqa) given to Charities (NGO, Madrasa, Islamic Trusts)

As a financially able Muslim, you will be giving the Islamic charities of Zakat and Fitra. These donations can be given to individuals like your relatives or neighbourhood and you are obliged to give them preference by religion.
Additionally in case you are giving financial assistance to registered Madrasas and Islamic Trust or other NGO's you maybe eligible for I.T. deductions.
Note: For this the receiver has to be registered with I.T. Office and not just registration with any other government body. Sadly most Madrasa are registered with Government but not registered with I.T. Office and hence you cannot claim the deductions.

In India under Income Tax laws (Section 80G), you are eligible for tax deduction for your donation albeit several conditions. Maybe if you meet all the conditions than you might save tax for few thousand rupees:

1. Donations of cash only and not in kind.
2. If by cash, maximum deduction allowed is for Rs. 10,000 donation. Else the limit is higher for cheque/ draft/ electronic payment.
3. PAN of the donee is the most important thing needed.
4. Restrictions on the donations:
• Organizations specified by the government (allowing 100% or 50% deduction)
• 50% deduction for social welfare/ minority welfare and religious trusts.

Example: You have taxable income exceeding the basic slab. Say Rs. 4.5 lakhs. 

So tax on Rs. 2 lakhs @ 10% = Rs. 20,000 as tax

Suppose you pay zakat/ sadaqa of Rs 30,000. How much tax you will save?

50% of 30,000 = 15,000.

Tax is @ 10%. So tax saved is 10% of Rs. 15,000 = Rs. 1,500

In case your employer ask you upfront about it. You can declare the same and submit the proofs.
Else you can claim refund at the time of returns filing:

1. In your ITR form, the last tab/ section is 80G and it is here where you have to add your details.
2. In that there are 4 subsections: Goto Section "D. Donations entitled for 50% deduction with qualifying limits".
3. Enter all the required details. As I mentioned earlier the most important thing is the PAN of the organization.
4. Attach the receipts of your donation and then post the form. Keep a copy of the same.

That's it, now you can get back refund for the same.

Islamic Shariah classification of Mutual Funds in India

The fact that you have searched for this article is that you have doubt on the shariah compliance of MF's in India.
I have already discussed Shariah Compliant MF's in India.

Tip: Whenever you want to check a fund, just head to moneycontrol.com and search for the fund name in Mutual Funds. On opening the fund details, click Portfolio and it will show all details of where it is invested.

First an Islamic classification of MF is necessary for them to be categorized as permissible or not.

Based on duration, they can be classified as

• Open-ended
• Close-ended

Close-ended are always Haram since they have significant interest component.

Classification based on investment type is what we need to analyze here. I have added as many keywords as I could in the classification since there are several marketing words in the funds name.:

1. Equity (Stocks) based
1. Normal Equity - Diversified, Big/Mid/Low Cap
2. Equity Linked Saving Scheme (ELSS)/ Tax Saving
3. RGESS/ Tax Saving
4. Index
5. Sectoral/ Thematic
6. Arbitrage
2. Debt (Interest) based
1. Long/ Medium/ Short/ Ultra short
2. Bonds
3. Gilt /Treasury/ G-Sec
4. Money Market/ Liquid
3. Mixed or Balanced or Hybrid
1. Pension/ Retirement Plans
2. Income
3. Debt/ Equity oriented
4. Commodities/ ETF
5. Fund of Funds
1. International
2. Indian

First we target the easy ones:
#2 (Debt/ Money Market) and #3 (Hybrid/ Balanced) are clearly 100% Interest based earnings and hence nothing to discuss on them. Even if they say "equity oriented" they will still have significant interest component.

#4 (Commodities/ ETF) is based on metals or gold or other commodities. As per Islamic law, you have to first take physical possession of goods before selling. In these cases you never get the goods nor are you aware if even the Mutual Fund has taken physical delivery of goods.

#5 (Fund of Funds) is based on other Mutual Funds in that they buy portion of other Mutual Funds. Because of this it becomes very difficult to analyze where the money is invested and hence should be avoided.
I will inshallah research more on them and cover in a future post.

Gold ETF and Gold Mutual Funds are already covered in this article:
Halal Ways of Investment in Gold

Equity Funds:

1. Normal Equity - Diversified, Big/Mid/Low Cap
2. Equity Linked Saving Scheme (ELSS)/ Tax Saving
3. RGESS/ Tax Saving
4. Index
5. Sectoral/ Thematic
6. Arbitrage

#1, #2, #3, #4 all will have significant investments in stocks of haram sectors (banking/ finance/ alcohol/ tobacco, media) around 25% - 40%.

#6 is arbitrage which is haram (arbitrage is kind of a daily betting)

#5 maybe considered somewhat permissible but there are some red flags obviously. First the sector has to be proper (Banking/Finance is obviously not useful). However, if you take Technology, then the problem comes that they earn most of the revenue working on IT for finance/banking projects. For Infrastructure, the problem will come that the stocks are all heavily into debt and are paying large amounts as interest.

How to Invest in a Halal way

This post is based on a comment made by a reader on the article:
Halal Tax Saving Investments in India
Sinan Suhel has the following strategy for halal investing (I have striked out some parts which I do not consider halal):

Assalam Walaykum, I liked this blog coming straight from heart. I am an IT and constantly researching from last 6 years on making my investment halal.
First thing. no matter what we think and what arguments we bring to prove it, no matter even the entire world agrees with it, no matter how many so called fatwa raised for personal gain, ALLAH's LAW REMAINS SAME and his JAHANNUM is bigger enough to accommodate those who rejects his AYATs (but remember ALLAH is most merciful).

Why we dont want haram money?
1. Allah forbids it
2. personally I am not a big fan of taking showers of fire in Jahannum for eternity for my afterlife
3. We dont want to raise our children with haram money and in the home that belongs to bank for next 20 years
4. The Zakat of haram money is rejected, you are not suppose to calculate haram money for Zakat because Allah does not accept it 
5. Hajj cannot be done by this money, its rejected
6. Sadka, Khairat or fi Sabilillah is not accepted by Allah from haram money

How can we expect barkaah in our children, wife and family members, who had been fed, clothed and raised from haram? 
How can we ignore the fact that the blood that flows in their veins, the muscles they developed, the beauty they have, all came from haram money?

WHAT TO DO?
Lets accept the fact that in india there are not too many options to invest in halal. But yet there are ways.
I agree with Fazeel and Imdad both and have came up with a good investment solution.
1. While investing in tax saving (haram) bonds, calculate the interest they are likely to give and give it to some needy on the same day you invest, THIS SAVES TAX
2. Never put money in FD, it going to reduce it if you know about inflation and tax on FD
3. Part your money into 4 equal parts
   A. Saving 
   B. Contingency 
   C. Invest in Shariah Good Mutual Funds/Gold 
   D. Invest in Mid Caps Fund 
4. Once you will reach the goal for savings (12 months of your expense) you will be able to put more in other parts
5. Now, once you have enough in B. and C., you can buy a land
6. Down the years you will be able to buy 5-6 plots from that you can sell 1-2 to get enough money to build the home on 1-2 plots
7. This way you will end up having home, decent investment, contingency funds and savings.

As far as investment in concern, there are some good MidCAP as well a Shariah funds you can look for: 
TATA ETHICAL FUND
Goldman Sachs CNX Nifty Shariah BeES

For non shariah funds:
BIRLA SunLife FrontLine (0% in debt but 20% in baking), so you can take out 20% of profit from banking allocation 

NEVER INVEST IN LIQUID, DEBT OR BANKING/FINANCE FUNDS.
I have done lots of research by the ilm and taufiq given by Allah, so if anyone wants any help regarding investment strategy or funds (not specific stocks), please do ask me and I will try, by Allah's guidance and mercy, to help my brother and sisters.

MAY ALLAH, THE MOST MERCIFUL AND THE MOST GRACIOUS, GUIDE US AND PROTECT US