Ethical/Shariah funds fare well in the long run

They have lagged over the past year, though, missing out on banking stocks that did well

For those seeking to invest in accordance with Shariah principles, there are just three funds in India — Tata Ethical, which has been around since 1996, and Taurus Ethical and Reliance ETF Shariah BeES, set up in 2009.

Tata Ethical and Taurus Ethical are active mutual funds that, in line with Shariah principles, do not invest in sectors such as banking, alcohol and gambling, or in companies with high debt. Reliance ETF Shariah BeES employs a passive strategy, seeking to track the performance of the Nifty 50 Shariah Index.

Tata Ethical undertakes a process called purification on a yearly basis, wherein it calculates incomes from prohibited activities and donates it to charities. Reliance ETF Shariah BeES states that it is not a Shariah-compliant scheme — that’s because though it invests only in stocks represented by the Nifty 50 Shariah index, it has not appointed a Shariah board and does not follow any Shariah dividend purification process.

While Tata Ethical has a reasonably big corpus (₹480 crore), Taurus Ethical (₹30 crore) and Reliance ETF Shariah BeES (₹1 crore) are very small in size.

Tata Ethical delivered 13.8 per cent return over the past year, far behind the nearly 25 per cent return of its benchmark Nifty 500 Shariah. Taurus Ethical’s 13.4 per cent return the past year is better than the 12.2 per cent return of its benchmark S&P BSE 500 Shariah.

Reliance ETF Shariah BeES, with 20 per cent return, was on par with its benchmark Nifty 50 Shariah’s returns over the past year.

All the three funds lagged the broader market, though, with the Nifty 500 index up nearly 26 per cent the past year. Many banking stocks have had a strong run over the last 12 months; not having these in their portfolio has been a drag on the ethical and shariah funds.

But these funds have done fairly well in the long run. Over the past five years, Tata Ethical’s annualised return is about 18 per cent while that of Taurus Ethical and Reliance ETF Shariah BeES is about 15 per cent and 14 per cent, respectively.

These returns are at par or better than those of the benchmarks.

Investment strategy

All the three funds invest a chunk of their corpus in equity, with the rest in cash; they have no debt holdings in keeping with their mandate. The portfolio of Reliance ETF Shariah BeES comprises the big names of the market, excluding banking stocks — the list includes Reliance Industries, TCS and Maruti Suzuki.

For Tata Ethical Fund, nearly a third of its portfolio is made up of mid- and small-caps. The biggest holdings, however, remain large-caps such as Reliance Industries, Maruti Suzuki and Shree Cement.

Taurus Ethical too is a multi-cap fund with about a third of its corpus in smaller stocks; its largest holdings, though, are in large-caps such as Petronet LNG, Infosys, Maruti Suzuki and TCS.

Over the last year, Reliance ETF Shariah BeES benefited from the strong rally in Reliance Industries and Maruti Suzuki that together account for about a third of the portfolio. The poor show by stocks such as Infosys and Sun Pharma has been a drag on Taurus Ethical.

Similarly, it was the software and pharma stocks such as Infosys, Mindtree, and Divi’s Labs that contributed to the weak performance of Tata Ethical Fund.

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