India’s modest Shariah market could boom with younger, ethically-driven investors

• Minuscule Shariah market despite massive potential Muslim population
• Younger investors drive momentum by viewing compliance as ethical investing
• Strategic Middle Eastern outreach may catalyze future institutional sector growth

India remains a global outlier in Islamic finance, possessing the world’s third-largest Muslim population – yet maintaining a Shariah investment sector that is relatively miniscule.

While India’s conventional mutual fund market manages roughly US$880 billion across nearly 2,000 funds, the Shariah compliant segment tracked by the IFN Investor Funds Database has just five public funds with a combined US$476.18 million AuM by Q4 2025.

This stagnation is rooted in historical geopolitical tensions stemming from the 1947 independence partition, which have fueled a long-standing political resistance toward instituting Islamic financial services.

The Reserve Bank of India does not promote Shariah banking, reflecting a regulatory environment that has historically prioritized secular frameworks over religious-based financial alternatives.

Asset spread, performance

Despite regulatory headwinds, India’s Shariah funds have demonstrated specialized growth across different cycles.

The IFN Investor Funds Database shows that by the end of 2025, India’s Shariah AuM of almost US$480 million ranks it fifth in the Asia Pacific – trailing Singapore’s US$554.7 million, but ahead of Australia’s US$391.62 million.

Table 1: Largest Islamic fund markets in Asia Pacific by AuM as at end 2025                   

India’s Shariah sector is exclusively equity-based, with the US$376.39 million Tata Ethical Fund staying the dominant domestic player.

Islamic mutual funds have generally performed best in sectors such as IT, healthcare, industrials/materials and selected consumer businesses, as these areas tend to meet Shariah screening criteria more easily and have also been among the stronger contributors to equity market returns in its fund portfolio.

But performance also varies wildly. The Mauritius-domiciled Tata Indian Sharia Equity Fund (Class B) posted a stellar 32.45% one-year return in 2025. But domestic counterparts like the Nippon India ETF Nifty 50 Shariah BEes and the Quantum Ethical Fund saw negative returns of -3.67% and -2.6% respectively during the same period.

Table 2: India’s leading Islamic funds by AuM at end-2025

Ethical appeal, risk management

A new momentum is building as younger, better-educated investors increasingly view Shariah compliance as a proxy for ethical and high-quality investing.

Quantum AMC’s Chief Investment Officer Chirag Mehta noted that roughly one-third of India’s 6,000 listed companies are Shariah compliant, including 48% of the large-cap segment. This breadth allows fund managers to construct diversified portfolios of 40 to 50 stocks without excessive concentration.

Beyond sector exclusion, managers emphasize that Shariah principles act as a governance red flag. This risk-averse approach is drawing interest from high-net-worth individuals and family offices seeking Indian exposure through a disciplined lens. As perceptions of stability and liquidity improve, the segment is slowly moving from a niche religious offering toward a commercially viable investment category.

Outlook

The long-term outlook for India’s Shariah sector hinges on the reconciliation of political will with the nation’s ebullient economic growth and increasing efforts to court Middle Eastern investment.

While the market remains a mere slice of the broader US$880 billion mutual fund industry, rising demand from younger, value-driven investors and high-net-worth individuals signal a shift toward broader commercial viability.

Strategic initiatives like the India-Middle East-Europe Corridor and high-level diplomatic outreach to Kuwait and Qatar could provide the necessary catalyst for institutional expansion. Ultimately, the sector’s ability to move beyond its current niche status depends on whether regulators leverage Shariah filters as a tool for attracting stable, ethical capital into India's high-growth large and mid-cap segments.