Islamic Finance Blog & Articles
The accelerating growth of a niche market has been propelled by the growing desire amongst Muslim investors to indulge in financial undertaking while remaining faithful to their religious principles. As a result, the halal investment industry has caught the attention of major equity institutions.
And according to financial experts, the industry will continue to grow rapidly along with the consumer base for these services. By the end of 2030, the industry is expected to see a surge by about 35 percent all across the globe, particularly in the continents of Asia and Africa.
What is Halal Investment?
Halal investment, more precisely referred to as shariah-compliant investing involves investments that comply with Islamic principles and regulations. The requirements of shariah compliance are highly subjective and as a result, they are subjected to constant debate both in theoretical and practical circles.
Historically, the concept of Halal is more prominent with respect to food, but it is also applicable to everything beyond food and includes finances, business, investments, and general lifestyle.
What are the asset classes you can and cannot invest in?
According to Shariah scholars, it's important to conduct a two-step screening process for determining whether or not an investment complies with Islamic financial principles. First of all, it's qualitative whereby a company's various lines of business are evaluated to check if it indulges in any kind of activity that's not permissible in Islamic traditions. The quantitative aspect comes second where every company must pass various financial tests. For instance, if a company has a lot of debt or derivatives, then the company is not permissible for halal investments.
It's worth mentioning that stocks have to be assessed for financial ratios and lines of business along with other considerations to check if any purification dues are required. Since traditional bonds work on the basis of lending and borrowing, they are absolutely prohibited. An investor can rather go for Sukuk or Islamic bonds which are considered halal. Further, Options are typically prohibitive in nature and they showcase a financial right rather than being a tangible asset. And as currencies are also bought through options, they are also not considered as halal investment.
How much should you invest?
As you are aware of the various asset classes, the next question that has supposedly come to your mind is that how much should you invest. After all, allocating your savings skilfully across the different asset classes is very crucial. And it goes without saying that portfolio diversification is really an arduous task. In most cases of Halal investing, it is observed that the portfolios feature an inappropriate amount of stocks and cash investment.
As per the opinion of season investors, people should aim to hold something between 25 and 50 percent of the investment portfolio in bonds. This is because bonds are considered a viable source of stable income. Even if it's not possible to allocate as high as 50 percent income in bonds, real estate investment can pose to be a viable alternative to this. But bonds are forbidden for muslims to invest in so muslims can opt for sukuk or Islamic bonds
With real estate investment, you can have a steady flow of income which is similar to bonds. This implies that the investments will be safeguarded from inflation. Another important bonus point of investment in real estate lies in the long-term appreciation of capital.
The biggest mistake investors make
Perhaps the greatest mistake that an individual commits with respect to their investments is counter-intuitive. Most people start investing when it's too late.
The next thing to take into account is that an investor must have fundamental knowledge before diving into the world of halal investment. This knowledge offers a rough idea about the asset classes along with the different investment classes that you can go for. The last thing you should do is to rush into making the investment without having complete knowledge about what you are going into.
Another mistake that beginner investors commit is that even after gathering enough information on halal investment, they hesitate from investing. They wait for accumulating some more information and wait for the market to play out.
The best way to learn and become an experienced investor is to try out investing with smaller amounts into different asset classes and observe the market movements. In other words, investing in a controlled manner is the most effective way of learning to invest in the right way. Within a span of 4 to 5 months, you can quickly find what kind of halal investment you are comfortable with. It is impossible to achieve that knowledge without trying and testing out different options.
You can also invest in Shariah compliant unit trust or mutual funds which the fund manager has already diversified it for you so you do not have to research and choose your own stocks which will take a lot of your time.
How to start?
Right from screening for halal options to opting for the right kind of fund, there are numerous aspects that go into a halal investment. The most crucial thing is to conduct thorough research and seek assistance from a professional in case you are unsure of anything. There are several investment options that a Muslim investor can take advantage of and a reliable financial advisor can offer the right guidance if you're a beginner.
For becoming a successful halal investor, you need to dedicate a lot of your time and effort to comprehend the terms and conditions of the investments. This is where the role of an experienced financial advisor comes in. They can help you outline your financial goals, risk appetite while allowing you to etch the time frame required for a particular halal investment to earn benefits.
The bottom line
A majority from the Muslim community unknowingly or unintentionally park their money in traditional savings account that does not provide enough returns to beat inflation and beside that the interest earned is not permissible in Islam
On the other hand, halal investing encourages the investors to earn money in a socially acceptable and responsible way as per Islamic customs. There is a lot of scope and opportunities for Shariah-compliant investments across the world and a reputed financial advisors can help you through the journey.