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.