“How do we manage risk?” you might be wondering. Diversification is beneficial. Non-Muslims should invest in equities and bonds to diversify their holdings. Instead, Muslims could invest in equities and gold. A new Shariah Standard on gold was recently adopted by the Accounting and Auditing Organization for Islamic Financial Institutions. As a result, Muslims can invest in gold ETFs.
Risk is reduced by rebalancing a stock market portfolio with bonds or gold. When equities fall sharply, for example, many investors put their money in bonds, gold, savings accounts, or mattresses. Needless to say, the bed is not something I would recommend.
When there are more buyers than sellers in a market, demand for that asset type rises. This may result in a price increase. As a result, when stock prices fall, gold and bond prices often climb as investors flee to bonds or gold.
Here are a few illustrations. Five times since 1986, global markets have declined more than 10%: in 1990, 2000, 2001, 2002, and 2008. Bonds and gold, as shown below, either increased in value or did not fall as far.
Is a Shariah-compliant ETF available?
An Exchange Traded Fund (ETF) is a cutting-edge financial product that combines the finest aspects of open-ended funds and publicly traded stocks. ETF is described as “a listed index-tracking fund organized as a unit trust scheme or any other permissible structures whose principal purpose is to attain the returns that correspond to the performance of a certain index” under the Securities Commission Malaysia’s Exchange-Traded Funds Guidelines. Simply explained, an ETF is a unit trust that is listed and traded on a stock exchange. In general, ETFs are passively managed since they attempt to duplicate the performance of a specific market index by investing all (full replication) or virtually all (strategic sampling) of the constituent stocks.
Unlike a traditional ETF, which can track any benchmark index regardless of the Shariah status of its member equities, an i-ETF tracks only benchmark indexes with Shariah-compliant companies as index constituents. Aside from that, the i-management ETF’s must adhere to Shariah principles and Islamic investment rules. A Shariah board, committee, or advisor oversees the operation of i-ETF and conducts Shariah-compliant audits and reviews on a regular basis.
Before becoming an i-ETF, a fund must go through a stringent Shariah screening process. The index constituents are screened using the methods established by the Shariah board, the index provider’s committee or advisor, the regulatory authority, and the fund itself. Shariah screening is performed at the time of investment choice and then periodically throughout the investment period to ensure continued Shariah compliance. Any corporate moves such as mergers and acquisitions, delisting, or bankruptcy are taken into consideration by the aforementioned periodic Shariah compliance monitoring. As a result, the i-ETF is periodically cleaned by detecting, separating, and distributing to charity any Shariah non-compliant income.
i-ETFs can be bought and sold through stockbrokers, just like stocks. The Exchange currently has six (6) i-ETFs listed and traded.
Investors can gain immediate exposure to the firms that make up the monitored index by purchasing one unit of i-ETF.
The management charge is very minimal because the fund is passively managed. As a result, the i-ETF is a cost-effective long-term investment.
i-ETFs are listed on Bursa Malaysia’s Main Market, just like stocks, and trading of i-ETF units is done in a single transaction at the current market price. It is possible for investors to do so either online or through their stockbrokers.
Throughout the trading day, the i-ETF price is readily available in real time. The fund management’s website has more comprehensive and up-to-date information on the i-ETF, such as the daily fund value and quarterly manager report.
What exactly is an Islamic ETF?
An Islamic ETF exclusively tracks an Islamic benchmark index that includes Shariah-compliant corporations as index constituents. An Islamic ETF must also employ a Shariah adviser/committee to give knowledge and guidance to ensure that its structure, investments, and governance are all compliant with Islamic law.
Where do you look for halal stocks?
Are you looking for Halal stocks?
- Debt ceiling. According to experts, a company’s stock can be classified as Halal if the debt-to-value ratio is less than 33 percent.
What exactly is a halal investment?
Halal investing necessitates making financial decisions based on Islamic standards. Investors typically consider halal investing to be a category of ethical or socially responsible investing because it is a faith-based approach to financial management.
Investors must share in profit and loss, get no income (riba), and not invest in a firm that is prohibited by Islamic law, or sharia, according to Islamic principles. Before investing in a company, it’s important to look at its financial statements and business activities to see where its key revenues originate from and how its balance sheet is managed. Halal, or lawful, is a firm that meets certain conditions (described below). It would be haram, or forbidden, if it did not fit the standards.
The application of Islamic law to commercial activities can be complicated, and halal investing guidelines can differ. Because there are so many various requirements, Muslim investors frequently seek advice from Islamic authorities to establish whether a certain investment is halal.
Companies whose major commercial activities contradict the essential tenets of Islam, such as the manufacture or sale of alcohol, gambling or gaming activities, conventional interest-based financial services, pork and pork products, and pornography, are all considered inappropriate by sharia scholars. Furthermore, the majority of sharia scholars warn against investing in cigarette companies.
Financial standards have been developed by Islamic scholars to identify when a commercial activity is a primary source of revenue and when it is not. The “five percent rule,” for example, states that a key business activity is one that generates more than 5% of a company’s revenue. The Islamic prohibition on riba, or interest, follows the same logic. Investing in a corporation is prohibited if its interest-based income or holdings surpass specific limits.
It is often impossible to avoid engaging in haram commercial activity. As long as the investment fits the conditions specified in the Halal Investment Screening section below, this is allowed. Muslim investors, on the other hand, must account for any revenue generated from riba or other haram sources and then give it away to a charity or someone in need, according to Islamic scholars. The process of “purification” or “cleaning” polluted investment income is known as “cleansing.” Scholars also agree that tainted investment returns should be purified anonymously so that the donor does not get any residual benefits, such as personal recognition or a tax deduction.