In this piece
Who certifies it?What does it hold?How much debt do the companies carry?Does any income need purifying?What will it cost, and what could you lose?Comments- “Ethical” and “halal” aren’t the same word.
- Look for a named certifier, and read what the fund holds.
- Compliance doesn’t protect you from a falling market.
A fund can call itself sustainable, responsible or ethical and still hold banks, or pay you income from interest. Those labels answer a different question. Here’s what to look for instead.
1. Who certifies it?
Look for a named shariah board or a recognised index methodology in the fund documents. If you can’t find one, that tells you something. A word in the marketing is not a certificate.
2. What does it hold?
Open the factsheet and read the top holdings and sector split. You’re looking out for conventional finance, alcohol, tobacco, gambling and similar lines of business. Screens exclude them, usually with a small tolerance for incidental income.
3. How much debt do the companies carry?
Screens also test debt and interest-earning assets, commonly against a limit of around a third of market value or assets. The exact limit changes with the standard being used, which is why two halal funds can hold different companies.
4. Does any income need purifying?
A small part of a company’s income may come from sources you’d want to give away. Some funds work this out for you and some leave it to you. Check which one you’ve bought.
5. What will it cost, and what could you lose?
Compliance doesn’t protect you from a falling market. Shariah funds tend to lean on particular sectors, so the ride can differ from a broad index fund. Check the ongoing charge too, because fees compound just as returns do. Your capital is at risk.
If a fund’s documents can’t tell you who decided it was compliant and on what rules, pick a fund whose documents can.
Then see how the numbers could add up with the retirement calculator.
If you spot a mistake, tell us and we’ll fix it.
Capital at risk. Investments can fall as well as rise, and you could get back less than you put in. Past performance is no guide to the future. Nothing here is a recommendation to buy any fund or platform.
