India's sharia market gains ground
Taurus Mutual Fund has launched India's first actively managed sharia-compliant fund that is available to local retail investors, the Taurus Ethical Fund.
For India, this marks the latest in a series of firsts in its sharia market, which was non-existent until this year. Earlier this month, Benchmark Asset Management launched India's first exchange traded sharia-compliant fund, the Shariah Benchmark Exchange Traded Scheme, which tracks the S&P Nifty Shariah index. The index is made up of 37 stocks that represent close to half the market capitalisation of shares listed on India's National Stock Exchange. Last month, HSBC Asset Management launched the HSBC Amanah India Shariah Portfolio, benchmarked against the Dow Jones Islamic Market India Index and the Bombay Stock Exchange 500 Index, for investors that can afford the minimum investment of Rs2.5 million ($50,000).
For Taurus Mutual Fund, this marks the start of a concerted effort for the fund management company that isn't among the major players in the industry asset-wise to gain more market share. It also marks an attempt to make its name in the promising sharia space. Taurus Mutual Fund has around Rs2.5 billion ($50 million) in assets under management compared with Benchmark Asset Management's AUM of around $500 million.
Sharia principles generally preclude investments in businesses such as conventional financial services, alcohol, pork-related products, gambling, leisure and entertainment. They also preclude interest-bearing investments and investments in companies with unacceptable levels of debt.
The Taurus Ethical Fund is a diversified equity fund that's benchmarked against the S&P CNX 500 Shariah index, which was introduced by Standard & Poor's in February 2008. That index is made up of sharia-compliant stocks from the S&P CNX 500, which covers more than 90% of the total market capitalisation and more than 80% of total traded volume on India's National Stock Exchange (NSE).
The fund will invest between 80% and 100% of the portfolio in local shares, with a maximum 20% limit on non-interest bearing money market instruments. However, since there are no sharia-compliant money market instruments in India at the moment, any money that's not invested in equities will be parked in a non-interest bearing current account.
Taqwaa Advisory and Shariah Investment Solutions (Tasis) serves as the fund's independent advisor and will check to ensure that the fund's investments comply with sharia norms.
The fund's investment universe is the constituents of the S&P CNX 500 Shariah index. Tasis is expected to filter the stocks, regularly monitor Taurus Mutual Fund's stock picks, and certify their sharia-compliance on a quarterly basis. Taurus Mutual Fund expects the fund to have exposure in around 25 to 40 stocks, with around 40% to 60% of that being large-cap shares. For the first six months, Taurus Mutual Fund expects to hold the full 20% limit in cash.
"It's all about investing in the right businesses and sharia compliance ensures that. The need to pick businesses that foster wealth creation over the long-term and distribute it equitably forms the basis of sharia investing," says Waqar Naqvi, Mumbai-based CEO at Taurus Mutual Fund. "It also provides an effective filter to identify and avoid speculative businesses."
Taurus Mutual Fund has described sharia funds as a "socially responsible way of investing in the capital markets", with Naqvi saying that sharia investments have been generally left unscathed during the credit crunch.
Mohit Mirchandani, head of equity investments and manager of the Taurus Ethical Fund, says the strategy is to invest in sectors relatively less affected by the global credit crisis and in companies with good business models, strong balance sheets, the ability to generate cash, and strong management. He believes that large-cap stocks are in a better position to survive the current global credit crisis. In the long-term, the fund will diversify across large-, mid- and small-cap shares, he says.
Mirchandani joined Taurus Mutual Fund earlier this month from the Indian fund unit of ING Group. He brings with him 14 years of work experience with financial institutions across US and India. Mirchandani was most recently a portfolio manager with ING Investment Managers in Mumbai after working for the same company in the US.
India is the world's third-largest Muslim population after Indonesia and Pakistan, and that's why there's a strong potential for the sharia market to grow. Malaysia, a predominantly Muslim nation in Asia, has so far led the region in making strides in the sharia market both in terms of number of funds launched and AUM. As of November 2008, sharia funds domiciled and managed in Malaysia totalled 145, with a combined AUM of $4.6 billion in November 2008.
Around 70% of the stocks listed on the Bombay Stock Exchange are sharia-compliant, and make up almost 60% of the market capitalisation of nearly $600 billion.
Assets in sharia-compliant investments total around $65 billion, according to financial services research firm Cerulli Associates. Around $600 billion of Islamic money is locked up in fixed deposits worldwide, according to industry sources.
The initial subscription period for the Taurus Ethical Fund was opened last week and runs until March 20. Minimum investment is Rs5,000 ($100).
The fund charges an entry load of 2.25% for all one-time investments, but waives that charge for those investing through a Systematic Investment Plan (Sip) facility -- where investments can be made in staggered amounts but on a regular basis. The fund will charge an exit load on one-time investments of 1% for redemptions made in the first six months of investing, 0.5% for redemptions after six months to one year of investing, and nothing for all redemptions after one year. For Sip investments, an exit load of 2.25 % is applicable, if redeemed within one year from the date of investment.