By Islami Tijara,
This is first part of the 4 part series on the idea of Equity Market being best investment options for Muslims
Every Muslims should take advantage of the boom in the Equity market and they should not be left behind in the economic growth that is being witnessed throughout the country. In order to remain in the main stream of the economy and have equitable investment opportunity, Equity stock market (The Islamic way) provides the most cost effective investment solution for the Muslims. Equity market have proved that they are not only the most effective, transparent, liquid and conducive to small and big size investors as a means of investment, but history has also proved that it outperforms all other asset classes where return on investments is the parameter considered. In the long term equity market always goes up. Hence Muslims must invest in the equity market.
On the onset, investment in equity market is a permissible activity from Islamic point of view, since it is based on Musharakah (Partnership) and the profit is earned with risk of loss. However there are some issues for a Muslim to invest in equity market (explained later).With the guidance of Ulama (Islamic scholar) and approval it is now possible to invest in equity market the Islamic way, and this perhaps is the best option available for the Muslim.
We first look in to the inherent advantage investments in equities have over other forms of structured investments.
1. Fixed Interest (Riba) Based Investments
Fixed interest (Riba) based investments like the saving bank deposit, Bank FDR; Postal savings, Debentures, Bonds etc are prohibited in Islam. “O those who believe, do not eat Riba (usury or interest) multiplied many times. And fear Allah, so that you may be successful.” (Al-Imran verse 130) Islam has discouraged fixed saving and withholding wealth but it has encouraged investments. Profit is only with the risk of losses. In equity investment the profit and loss is shared in proportion to the investments made. Thus, investment in equity market is in accordance to the Quran and Hadeeth injunctions.
2. Investment in Real Estate
Investment in Real estate/ properties, is although permissible but has certain disadvantages over equities. First, because of the unit size, it is not possible for every individual to buy property since the cost involved is huge whereas, one can invest in equity for an amount as low as ` one thousand and there are no upper limits.
Secondly, property is subject to a lot of legal paper work and one has to go through a very cumbersome procedure to acquire properties. However, it is very easy to buy and sell shares by being a member of a SEBI registered broker. So buying and selling shares is as easy as snapping your fingers. Finally, there is often a threat of encroachment of the property which involves costly litigation. Equity shares have a big advantage here since the stocks purchased get directly deposited in the investor’s Demat account where it is in the safe custody and one can sell them whenever and as much as he wants to sell. And in terms of returns in the long term, equity investment has outperformed this asset class.
3. Investments in Conventional Mutual Funds
Investments in Conventional Mutual Funds are not permissible from the view point that these mutual funds don’t follow Shariah rules, thus they do invest in ‘Haram’ or prohibited companies like liquor, banks, hotels , entertainment etc that is strictly prohibited in Islam, hence profit earned from these mutual funds is impure and tainted. Investment done by mutual funds does not take in to account the companies huge interest based debt and high interest earning. However, Muslims can invest in Shariah compliant Mutual fund / Shariah compliant PMS / Shariah ETFs.
One more point that goes in the favour of equity stock market is the Capital gains tax. There is no capital gains tax for long term investors i.e. if the investment is held for more than one year. And for the short term investments of less than a year, investors have to pay only fifteen percent tax on its gains. Muslims must take advantage of this benefit and invest in equities that would help them create wealth in the long term in the Shariah way.
The concerning part in the equities investment is the market risk and volatility. There is a way out to overcome this, investors should take guidance from Equity Research advisors and Fund managers who can guide and advice them on their investments. But the best way is to invest in equity market through structured SEBI approved Shariah compliant investment products like the PMS, Mutual Funds, ETFs etc.
(Note- ‘Islami Tijara’ is India’s only Magazine, which covers Islamic Finance industry exhaustively. Please visit www.islamitijara.com for more details.)