Investing has become a major part of wealth creation, but many investors also want their money to be invested in a way that matches their ethical and religious values. This is where Shariah compliant mutual funds come in. These funds follow Islamic finance principles and invest only in companies that pass Shariah screening. In simple words, Shariah mutual funds aim to provide long-term growth while avoiding interest-based businesses and non-permissible industries.

In this blog, you’ll learn the meaning of Shariah compliant mutual funds, the main rules they follow, and a clear list of such funds available in India.

What Are Shariah Compliant Mutual Funds?
A Shariah compliant mutual fund is a mutual fund that invests according to Islamic law (Shariah). The fund avoids companies that earn major income from interest (Riba) or engage in prohibited activities (Haram). These funds are generally equity-oriented and invest in companies that meet both business screening and financial screening.

For example, even if a company is not involved in alcohol or gambling, it may still be rejected if it has very high interest-based debt or earns too much interest income. That is why Shariah funds have a special screening method.

What Shariah Compliant Funds Avoid
Shariah investing avoids businesses such as conventional banking and interest-based finance, alcohol, gambling, tobacco, pork-related industries, adult entertainment, and other non-permissible sectors. The aim is not only religious compliance but also ethical investing.

Because of this filtering, Shariah funds often invest in companies with comparatively lower debt, since excessive interest-based borrowing is not allowed under screening.

How Shariah Screening Works (Simple Explanation)
Shariah screening happens in two major steps. First is industry screening, where companies are filtered based on the type of business they do. Second is financial screening, where certain ratios are checked (like debt levels or interest-related income).

Many funds follow a structured framework and are monitored through Shariah advisory processes to ensure they remain aligned with ethical norms.

List of Shariah Compliant / Ethical Mutual Funds in India
Below are the main mutual fund schemes in India that follow ethical/Shariah-based investing and are commonly listed as Shariah compliant or ethical funds.

1) Tata Ethical Fund
Tata Ethical Fund is one of the most well-known ethical funds in India. It is an open-ended equity scheme following Shariah principles and aims to provide medium to long-term capital gains through equity investments that match Shariah guidelines.

2) Taurus Ethical Fund
Taurus Ethical Fund is another long-running ethical equity scheme designed for investors who want investments aligned with Shariah norms. The fund’s official information describes it as a socially responsible and Shariah-based investment approach, and it commonly tracks Shariah-related benchmarks like the BSE 500 Shariah Index.

3) Quantum Ethical Fund
Quantum Ethical Fund is designed for investors who want their investments aligned with ethical and integrity-based principles. The fund uses a screening framework that focuses on ethical investing and long-term capital appreciation.

4) The Wealth Company Ethical Fund
The Wealth Company launched an ethical fund under SEBI’s ethical funds category, focusing on “sin-free” investing. It follows strict exclusions on industries considered unethical and is aligned with socially responsible style investing.

Shariah Compliant ETF Option (Passive Investing)
If you prefer passive investing instead of mutual funds, an ETF option exists.

5) Nippon India ETF Nifty 50 Shariah BeES
This ETF aims to track the Nifty50 Shariah Index and offers index-style exposure to Shariah-screened stocks. It is commonly referenced in Shariah investment discussions.

Who Should Invest in Shariah Compliant Mutual Funds?
Shariah compliant funds can be suitable for Muslim investors seeking Halal investment options. However, these funds are not limited to Muslims. Even non-Muslims invest in these funds because they support ethical investing and avoid sectors like alcohol, gambling, and tobacco.

These funds are best suited for investors who want long-term growth and can stay invested for 5 years or more, since they are equity-based.

Benefits of Shariah Compliant Funds
One major advantage is the ethical nature of investing. These funds avoid harmful industries and focus on businesses that meet moral filters. Another advantage is that Shariah screening often results in portfolios with lower debt companies, which can sometimes provide more stability in uncertain times.

Most importantly, these funds allow investors to participate in market growth while staying aligned with values.

Risks and Limitations
Even though these funds are ethically filtered, they still carry market risk because they invest mostly in equities. Another limitation is limited diversification—since many sectors like conventional banks are excluded, the fund may have fewer options to spread investments.

Also, performance may differ from normal diversified funds because Shariah funds may miss out on sectors that perform strongly in certain cycles.

How to Choose the Right Shariah Mutual Fund
When selecting a Shariah mutual fund, always check the following: the fund’s portfolio holdings, the expense ratio, long-term returns (3–5 years), risk level, and whether the fund has a consistent ethical screening strategy.

If you are a beginner, consider starting through an SIP to reduce timing risk and build discipline.

Final Thoughts
Shariah compliant mutual funds are a meaningful way to invest in equities while following Islamic principles and ethical standards. In India, investors have a limited but growing set of options such as Tata Ethical Fund, Taurus Ethical Fund, Quantum Ethical Fund, and newer ethical schemes like The Wealth Company Ethical Fund.

If your goal is long-term wealth creation with value-based investing, Shariah compliant mutual funds can be a solid choice—provided you understand the risks and stay invested patiently.