Islamic Halal and Ethical Funds: A Guide for Muslim Investors

The Rise of Islamic Finance and Halal Investing

Islamic (Halal) investing has become a fast-growing part of the global market. The global halal economy is projected to reach about $7.7 trillion by 2025 (up from $3.2T in 2015), and global Shariah-compliant funds' assets have roughly tripled in a decade to ~$200 billion.

With roughly 2.2 billion Muslims worldwide and about 197 million in India alone (as of 2023), the demand for faith-aligned investment options is significant. Yet many conventional investment products don't cater to faith-based needs. Shariah-compliant (halal) funds fill this gap by allowing observant Muslims—and other ethical investors—to grow wealth without compromising Islamic principles.

What Are Halal (Shariah-Compliant) Mutual Funds?

Halal mutual funds invest according to Islamic ethical rules. In Islam, halal means "permitted," so halal funds strictly avoid interest (riba) and haram industries.

Under Shariah law, earning interest is forbidden and investments in things like alcohol, gambling, pork products, weapons, and pornography are off-limits. In practice, this means a halal fund's portfolio is hand-picked to include only businesses approved by Islamic scholars. In other words, these funds are essentially a form of ethical, faith-aligned mutual fund that steers clear of any un-Islamic income or activities.

Key Screening Features of Halal Funds

Halal funds use a two-step Shariah screening process to ensure compliance:

1. Industry Filters (Business Screening)

First, industry filters exclude whole sectors. For example, no liquor, no casinos, no tobacco or pork producers, etc. They also typically exclude conventional banks and insurance companies, since these earn interest.

2. Financial Filters (Balance Sheet Screening)

Second, financial filters impose debt and interest limits. Most Shariah funds forbid investing in any company with excessive leverage or interest income. For example:

• Total debt/assets ratio: Must be below about 25–33%
• Interest income: Must be below roughly 3–5% of revenues
• Purification: Any incidental interest that the fund receives is usually passed to charity

A dedicated Shariah Advisory Board of Islamic scholars reviews and approves each holding to ensure compliance. All of these rules mean the fund's holdings are vetted for both their business and balance sheet, giving investors confidence that their money is being managed "halal."

Core Principles of Shariah-Compliant Investing

1. Interest (Riba) is Prohibited

Shariah funds avoid any business earning significant interest. They do not buy conventional bonds or debt instruments that pay interest (except compliant Sukuk-like papers), and any small interest that arises is donated to charity.

2. No Forbidden Industries

Companies whose main activities are alcohol, gambling, tobacco, pork products, weapons, etc., are automatically excluded. This extends to any business associated with these industries beyond a tiny incidental part of revenue.

3. No High-Risk Finance Firms

Firms like banks, NBFCs or insurance companies (which live off interest and leverage) are typically barred from halal fund portfolios.

4. Low Debt Requirement

Eligible companies must have low debt (e.g., total debt less than about 25–33% of assets). This rule ensures the companies are financially sound and not over-leveraged.

5. Shariah Board Oversight

Each fund has an Islamic advisory board that certifies compliance. The board periodically reviews the portfolio and can require selling any stock that becomes non-compliant.

Halal Funds Available in India

India's Shariah fund sector is small but growing. As of late 2024, India had only 5 Shariah-compliant equity funds (all open-ended equity schemes) with combined assets of about US$480 million.

This made India the 4th largest Shariah fund market in Asia-Pacific (after Malaysia, Pakistan, Indonesia). For context, all Indian equity mutual funds held ~₹23.5 lakh crore (~US$275 billion) by Mar 2024—so Shariah funds represent only a tiny fraction of the market.

Major Shariah Funds in India (2025-26)

1. Tata Ethical Fund (Tata AMC)

The flagship Shariah equity fund, launched in 2009. It has the largest AUM (~₹3,572 Cr as of late 2025). It invests in diversified Shariah-approved companies with benchmark: Nifty 500 Shariah index.

2. Taurus Ethical Fund (Taurus MF)

An equity fund (AUM ~₹320.5 Cr) that also follows Shariah screens for long-term growth. It usually holds fewer stocks, focused on ethical sectors.

3. Nippon India Nifty50 Shariah BEES (ETF)

An exchange-traded fund (AUM ~₹45.9 Cr) that simply tracks the Nifty 50 Shariah index. It gives direct index exposure to Shariah-compliant large-caps.

4. Quantum Ethical Fund (Quantum AMC)

A new open-ended equity fund launched in Dec 2024 (AUM ~₹87 Cr as of Nov 2025). It aims to invest ≥80% in Shariah-screened stocks and up to 20% in Shariah-compliant debt or money market instruments. It's classified "very high risk" due to mostly equity.

5. UTI Nifty500 Shariah Index Fund (Upcoming)

A passive index fund in the pipeline. In late 2025 UTI Mutual Fund filed with SEBI to launch a Shariah-compliant index fund mirroring the Nifty 500 Shariah Total Return index. It will invest 95–100% in the index's stocks (up to 5% in liquid/compliant instruments). This will be India's first Shariah Nifty500 ETF/Fund.

Performance of Halal Funds

While past returns don't guarantee future results, India's halal funds have been competitive:

• Tata Ethical Fund: Delivered about +16.2% per annum over five years (as of late 2024)
• Taurus Ethical Fund: Returned about +16.3% annualized (5-year)

These figures are on par with many top equity funds, reflecting strong stock market performance in recent years and demonstrating that faith-based investing doesn't mean sacrificing returns.

Comparing Halal Funds to Regular Funds

Halal funds are a specialized subset of equity funds with unique features. Understanding these differences helps investors make informed choices.

In short, halal funds align investments with religious values in exchange for a narrower opportunity set. They can still deliver competitive returns, but investors should be aware of the different sector exposures and risks (e.g., missing out on interest-led bank rallies, higher volatility if tech/healthcare sectors move sharply).

Pros & Cons of Halal (Shariah) Funds

Advantages

1. Faith-Aligned and Ethical

Halal funds ensure your investments stay permissible under Islam. Many Muslim investors value the peace of mind from knowing the money is only in halal businesses. This religious discipline doubles as ethical investing—avoiding industries harmful to society.

2. Socially Responsible

By design, these funds avoid alcohol, gambling, tobacco, weapons, etc., so they function similarly to socially responsible or ESG funds. They appeal to investors who want a morally conscious portfolio (even non-Muslims sometimes pick them for these values).

3. Transparent Screening

A formal Shariah board reviews every stock, and clear rules (like debt limits, prohibited sectors) are applied. This transparency can give extra confidence to investors about exactly where their money goes.

4. Potential for Good Returns

History shows halal funds can keep pace with the market. For instance, the Tata Ethical Fund's long-term returns (up to ~20% p.a. in some periods) have been comparable to many leading equity funds. They are fully invested in stocks (no cash drag), which helps long-term growth.

5. Open to All

Despite the name, Shariah funds are not restricted to Muslims. Any investor looking for ethical, values-based investing can buy them. This broader appeal means liquidity and fund sizes can grow over time.

Limitations

1. Sector Bias/Risk

Because banks and other financial stocks are excluded, halal funds can underperform if those sectors soar. Conversely, they may outperform when consumer or tech sectors do well. Investors should understand this different sector mix.

2. Limited Diversification

Fewer eligible stocks means higher concentration risk. For example, if several top Shariah-approved tech stocks decline together, the fund could feel it harder than a broad index.

3. Smaller Fund Size

The overall halal fund industry in India is tiny, so some funds have relatively low AUM. Low-AUM funds can have higher expense ratios or liquidity constraints. Always check the fund size and expense ratio. (Note: Indian Shariah funds have expense ratios around 0.65–0.97% in 2025.)

4. No Fixed Income

Shariah funds cannot use regular bonds, so they miss out on interest income opportunities and added diversification. They remain pure equity plays (or at most hold Islamic cash instruments).

5. Regulatory Environment

Currently, Indian regulators do not incentivize Islamic finance (unlike in some Muslim-majority countries). This means support for new products is limited, though that may change if demand grows.

How to Start Investing in Halal Funds with NiveshPe

At NiveshPe, we provide an 'Islamic Halal' Fund Basket to help Muslim investors begin their halal investing journey seamlessly.

Our Islamic Halal Fund Basket includes carefully curated Shariah-compliant mutual funds that follow strict screening criteria approved by Islamic scholars. Here's how to get started:

1. Download the NiveshPe App: Available for Android (join waitlist) and iOS (join waitlist)
2. Complete Your KYC: Simple online verification process
3. Browse the Islamic Halal Basket: View all Shariah-compliant fund options
4. Start Small with SIPs: Begin with as little as ₹100-500 monthly
5. Track Your Growth: Monitor your halal investments in real-time

Bottom Line: The Future of Halal Investing in India

For Muslim investors in India seeking Shariah-aligned investments, the choices are few but now available. These halal mutual funds follow strict ethical rules while aiming for growth. They offer a way to participate in India's equity markets "the halal way," combining faith-based rules with financial discipline.

As the halal economy expands globally (projected to reach $7.7 trillion) and awareness grows, expect more products and options in the future. Whether you're a practicing Muslim looking for faith-aligned investing or an ethical investor seeking socially responsible options, Shariah-compliant funds provide a transparent, values-based path to wealth creation.

Start your halal investing journey today with NiveshPe's Islamic Fund Basket—where faith meets finance for a better financial future.