Shariah Compliant Equity Portfolio

India has the largest number of Shariah-compliant stocks in the world. There are more than 1000 Shariah-compliant stocks listed on BSE and NSE. Of this more than 150 are continuously Shariah-compliant for more than 5 years. The largest sectors include Software, Automobiles, Capital Goods, Construction and Infrastructure, Drugs and Pharmaceuticals, Consumer Durables, FMCG, Telecommunication, Oil and Gas.

The aggregate PAT to Total Income ratio of the all listed stocks is 7.5% as compared to 8.7% for Shariah compliant stocks. It clearly proves that although the universe of all listed stocks is large as compared to that of Shariah compliant stocks, but in terms of profitability it ranks below the Shariah compliant stocks. Similar findings were given when all the listed stocks and Shariah compliant stocks were on the analysed on the basis of PAT to Net worth ratio.

It is often understood by people at large that Stock Exchanges are Gambling Dens and thus an unethical avenue for investment. This understanding is flawed, if we consider the criteria of investments listed below and the fact that any form of speculative trading, swing-trading, margin-trading, day-trading, short-selling or trading in derivatives is prohibited.

In fact every investment has to be made on the basis of the fundamental analysis of a company and its activities. It is possible to generate profits without compromising on Shariah by avoiding any dealings in companies whose business activities are related to:

  • Pork
  • Alcohol
  • Gambling
  • Financials
  • Advertising & Media (newspapers are allowed, sub-industries are analysed individually)
  • Pornography
  • Tobacco
  • Trading of gold and silver as cash on deferred basis

After removing companies with non-compliant business activities the rest of the companies are examined for compliance in financial ratios, as certain ratios may violate compliance measurements. The 3 areas of focus are leverage, cash and the share of revenue derived from non-compliant activities. All these are subject to evaluation on an ongoing basis.

  • Debt to Total Assets <=25%
  • Interest Income +8% of Interest Based Investment to Total Income <=3%
  • Cash + Receivables to Total Assets <=90%

SenSage provides a list of Shariah Stock and enables you to create a equity portfolio using the platform “Religare Online”.