Aarati Krishnan

Close on the heels of Benchmark Mutual Fund’s Shariah BEeS, Taurus Mutual Fund has unveiled its actively managed Taurus Ethical Fund. This open-end fund is the first actively managed product in the Indian mutual fund space that conforms to the principles of Shariah investing. It is benchmarked to the S&P CNX 500 Shariah Index.

Backdrop: The fund will refrain from investing in sectors or companies that aren’t compliant with Shariah principles. In the listed space, that means sectors such as banks and financials, tobacco, breweries, alcohol related chemicals and meat processing will not figure in the fund’s portfolio.

The fund will also apply additional company-specific filters to weed out companies that are high on debt or interest outgo, in keeping with the Shariah principles. The three financial filters are: Total debt/total assets less than or equal to 25 per cent, cash/receivables/total assets less than or equal to 90 per cent and interest income/total income less than or equal to 3 per cent.

These filters will make the fund’s investment universe more restricted as compared to a plain vanilla diversified fund. But Shariah-compliant stocks account for roughly half of the market capitalisation and turnover on the NSE. Roughly 260 of the CNX 500 companies and 40 of the 50 CNX Nifty companies feature in the respective Shariah indices of the NSE.

This suggests that this fund will have access to a sufficiently large universe to deliver good diversification. In fact this fund’s investment universe will be much larger than that of most theme funds.

Returns: It is difficult to arrive at the return prospects of this fund, given the lack of comparable products with sufficient history. However, in the global context, Shariah-compliant funds have outperformed broader market indices over the past two years.

This performance is clearly explained by their complete avoidance of financial stocks and highly leveraged companies, which have borne the brunt of the credit-triggered global financial crisis. Such out-performance may not be sustained at all times.

In fact, the fund’s basic tenet of avoiding highly leveraged businesses and leaning towards those with relatively high cash, would tilt the portfolio towards mature businesses with moderate growth prospects.

This may make such a Shariah-compliant portfolio a suitable option for conservative, rather than aggressive growth-seeking investors. A Shariah-compliant portfolio may also carry a valuation premium to the market today, given that over the past year stock market investors too have gravitated towards precisely such companies.

Pros and cons: For an investor looking for a Shariah-compliant mutual fund today, the only other option available is Benchmark Mutual Fund’s Shariah BeES — an Exchange Traded Fund which mirrors the Shariah Nifty (40 stocks from the Nifty). How should an investor make the choice between these two options? For an investor seeking a lower risk exposure that would certainly replicate the market, the passively managed Shariah BEeS should fit the bill; a low-cost structure is an added advantage.

Though active investing has worked well in the Indian market, whether Taurus Ethical Fund manages to outdo the former would depend on its ability to add value through stock selection. In this context, the performance of Taurus’ existing equity funds over three- and one-year time-frames, is not very impressive.

The three-year returns on the Taurus equity funds (Taurus Starshare, Bonanza and Discovery) range between a negative 13 and 25 per cent, compared to the diversified fund category average of a negative 11 per cent. The NFO closes on March 20.

(This article was published in the Business Line print edition dated March 15, 2009)
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