New momentum for Shariah fund offerings in India 

Recent launches of two Shariah compliant public funds in India have piqued curiosity on whether this investment category is entering a more sustainable growth phase in a nation where religious sensitivities are often turned into political fodder.

While momentum is building, the segment remains small. As at Q4 2025, India’s Shariah compliant fund sector comprised just five funds with a combined AuM of US$531.7 million, a mere slice of the country’s broader mutual fund market of 1,937 funds managing about US$880 billion.

Quantum AMC, which launched its ethical fund in 2024 and plans to launch another this year, sees Islamic asset prospects rising in response to many seeking investing alignment with their value systems.

“The equity culture in India overall is growing,” Chief Investment Officer Chirag Mehta told IFN Investor, noting that many investors entering Islamic funds are participating in equity markets for the first time.

Critically, applying Shariah principles with a back-test showed Quantum it was viable to achieve good risk-adjusted returns for investors. This approach gels with a rising intolerance, especially among the younger, better-educated populace, toward activities involving liquor, tobacco and gambling.

With many feeling that they should not be investing in these sectors, the firm’s ethical fund appeal is widespread, not just to Shariah-based investors, said Chirag. This ethical approach is not just based on sector exclusion, as the emphasis is also on risk management and governance.

Citing the example of Satyam Computers, which went bust in 2009, Chirag said that would have been a Shariah compliant company – but there was misgovernance.

“You need to identify those red flags. We never invested in that company. At Quantum, we have a saying: ‘If you shake hands with someone and you don't get your five fingers back, you don't shake hands with that person again.’”

Chirag noted that from India’s listed offerings of over 6,000 counters, roughly a third can be viewed as being Shariah compliant. “In the large-cap segment, there are 100 companies and out of those, 48 are Shariah compliant. In mid-caps, out of 150 companies, 74 are Shariah compliant. That allows us to construct a diversified portfolio of about 40-50 stocks without excessive concentration.”

Anuj Kapil, equity fund manager at Taurus Mutual Fund, said distributors have become more comfortable recommending the Islamic funds category – supported by the gradual increase in total AUM, which is improving perceptions around stability and liquidity.

With client demand coming from younger investors, non-resident Indians and long-term allocators, “the rise in assets is signaling to the industry that ethical funds are moving beyond a niche offering toward a more commercially viable segment.”

The better risk profile also appeals as Shariah filters exclude highly leveraged companies – naturally leaving firms with stronger balance sheets and cleaner cashflow profiles. “Since we cannot invest in high-debt companies or firms holding excessive idle cash, the portfolio tends to be tilted toward growth-oriented and capital-efficient businesses.”

Touching on client feedback, Anuj said most investors continue to prefer India-focused allocations, given their familiarity with domestic markets and the long-term growth opportunity.

Though strong interest has come from retail clients, he added: “We are seeing huge interest from high-net-worth individuals and some from family offices for Shariah compliant India exposure. But participation is still selective rather than broad-based.”