Halal Ninja Your guide to halal investing

Investing offers a great opportunity to increase wealth, but it's not without risk. The wrong trade can destroy wealth just as easily as it creates it, and it's important to talk about how to manage the risks of your portfolio as a whole.

This is especially important as you near retirement (or if you happen to be helping your parents with investing prior to their retirement).

That's what this post is about: minimizing risk.

What is a Mutual Fund

Just like ETFs, Mutual Funds offer a way for investors to buy a group of stocks using a single ticker. The difference is that mutual funds are 'actively managed' — i.e. there's someone (a fund manager) that wakes up each morning, does some research and updates the underlying list of stocks in line with whatever the purpose of the fund is (growing profits, reducing risk, etc). Also, mutual funds tend to have a lock-in period as well as minimum investment amounts.

Essentially, you're not buying a 'static' list of stocks — the way you would an ETF. You're buying the fund manager's work; and you're paying for the privilege.

The Cost Of Mutual Funds

The expense ratios, how much of a funds assets are charged in fees each year, are the primary cost associated with ETFs and Mutual Funds. These tend to be MUCH higher for mutual funds, to reflect the 'extra' work that the fund manager is doing.

For example, consider that the AMDWX (Amana Mutual Funds Trust Developing World) mutual fund has an expense ratio of 1.34%/year — compared to 0.85%/year for ISDE (which targets a similar segment).

That may not sound like a huge difference (~0.5%/year), but it works out to an extra $900 in fees on an initial investment of $10,000 over the course of 10 years.2

List of Halal Mutual Funds

Here's a list of all Shariah-compliant mutual funds:1

AMDWXDevelopingLarge/Mid cap1.34%US0.32%
AMAGXUSLarge cap1.02%US0.29%
AMANXUSLarge cap1.06%US1.12%
IMANXUSLarge cap1.33%US0%
ADJEXUSMid/Small cap0.99%US0%

Is It Worth It?

So if mutual funds are so expensive, are they worth investing in? The answer is almost always no.

The reason is that it's very difficult for any fund manager, no matter how good, to consistently beat the market. Warren Buffet famously won a $1,000,000 bet against an active fund manager, proving that money invested in the S&P500 grew quicker (net fees).

I'll caveat the above with one exception though: developing countries can be hard to access directly (e.g. foreign investors are not allowed to own stocks of Indian companies, Korea is just as difficult to access), so mutual funds become the only feasible route to access them. Even then, I'd only consider a mutual fund if no lower-cost ETFs exist.

  1. I spent several hours researching mutual fund options when compiling this list. If I happen to miss a Shariah compliant mutual fund, please let me know
  2. To clarify how we arrive at that number, consider that the expense ratio is deducted from the entire portfolio value at each year. It's modeled the same way the return profile is (the often quoted "8%/year" avg return over the past 50 years of the S&:500). Therefore, we'll just need to compare the returns for $10,000 at both ratios 1.34% and 0.85%. That is $$$10,000 * (1 + 0.08 - 0.0134) ^{10} = 19,055 $$$ vs $$$$10,000 * (1 + 0.08 - 0.0085) ^{10} = 19,949$$$ . The difference is ~$900