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Islamic equity fund eyes Gulf investors

Shariah-compliant firms in India offer potential.

Mumbai — While a leading Indian asset management company launched a Shariah-compliant equity fund almost two decades ago, Islamic finance is still in its infancy in the country, says the head of the fund house. “The number of such funds will grow only if there is greater participation by existing funds, making a stronger commercial rationale for their proliferation,” Arvind Sethi, managing director and CEO, Tata Asset Management Ltd, told Khaleej Times. “We are making progress in that direction.”

Tata Asset Management was among one of the first Indian fund houses to launch a Shariah fund, the Tata Ethical Fund in 1996. About six years ago, a similar fund was launched by another asset management company. However, last year, a leading fund house, which was planning to launch a Shariah-compliant fund, backed out at the last minute.

Both the leading stock exchanges in India, the Bombay Stock Exchange and the National Stock Exchange have introduced their versions of the Indian Shariah equity indices over the last five years.

Sethi noted that a few early initiatives in Islamic finance in the Indian banking and non-banking finance companies (NBFC) space have been challenged in a court of law. The matter is still sub-judice at some level, accounting for the fact that Islamic finance is still in its infancy.

Tata Ethical fund is an open-ended equity fund which invests in a diversified equity portfolio based on principles of Shariah. The investment objective of the scheme is to provide medium- to long-term capital gains by investing in Shariah-compliant equity and equity-related instruments of well-researched value and growth-oriented companies.

“We would like to promote the fund in the Middle East subject to local regulations,” said Sethi. “We understand that these regulations are likely to change in the UAE, which is a significant market. We would then like authorised distributors to adopt this fund for investors.”

According to him, some Gulf-based institutional investors are investing in the Tata Indian Shariah equity fund, the US dollar share class fund by the fund house.

Encouraged by the performance of the rupee-denominated Shariah fund, Tata Asset Management launched the dollar-denominated offshore fund about five years ago for international investors wanting to invest in Indian equities in a Shariah-compliant manner. “This fund is broadly a replica of the rupee-denominated fund, with the same portfolio manager, Shariah board, etc.,” Sethi added.

The Tata Ethical Fund has outperformed its benchmark index (S&P CNX Shariah Index) consistently by a wide margin over various periods of time, Sethi said. It has been rated a five-star performer by Value Research, a leading independent mutual fund research house, in a wider universe of diversified equity funds in India.

As on March 31, the Tata Ethical Fund had a corpus of Rs2.96 billion across 24,500 investment accounts. Interestingly, the fund has attracted non-Muslim investors, who today account for about 60 per cent of the corpus.

India has a large universe of Shariah-compliant companies across a wide array of industrial sectors, Sethi said. “Within this universe, there is significant potential for value creation,” he added.

Tata Asset Management has over 26,000 investment accounts from NRI investors in rupee-denominated onshore funds. A large proportion of these investors are from the Gulf, “and we look to opportunities to reach out to them,” he added.

— nithin@khaleejtimes.com