Shariah ETFs In India – 2026

What is Shariah ETF

A Shariah ETF (Exchange Traded Fund) is an investment product that provides exposure to companies that meet specific Shariah-based investment principles. Instead of selecting individual Shariah-compliant stocks, investors can buy a single ETF unit and gain exposure to a basket of companies through one investment.

Shariah ETFs are generally designed to track a Shariah-compliant index. The underlying index uses predefined screening criteria to identify companies whose business activities and financial characteristics meet the applicable Shariah investment requirements.

The screening process generally excludes businesses involved in activities such as conventional banking and interest-based financial services, alcohol, gambling, pork-related products and certain other activities that are considered non-compliant under the relevant Shariah methodology. Financial screening may also be applied to assess factors such as debt, interest income and other financial ratios.

Most Shariah ETFs follow a passive investment strategy. Their objective is to replicate the performance of the underlying Shariah-compliant index rather than having a fund manager actively select individual stocks. However, the ETF’s return may differ slightly from the index because of expenses, tracking error, transaction costs and other factors.

Shariah ETF units are listed and traded on stock exchanges. Their market price can change throughout the trading day depending on demand and supply and movements in the underlying stocks.

For investors seeking equity exposure while following a Shariah-based investment approach, a Shariah ETF can provide a convenient way to invest in a diversified basket of screened companies through a single exchange-traded product.

Factors to Consider Before Investing in Shariah ETFs

Before investing in a Shariah ETF, investors should consider the following factors:

● Underlying index: Check which Shariah-compliant index the ETF tracks and understand its methodology, constituents and weighting system.

● Shariah screening methodology: Review the business-activity and financial-ratio screens used by the index to determine whether companies qualify for inclusion.

● ETF price and NAV: The ETF’s market price can trade slightly above or below its Net Asset Value (NAV). Comparing the two can help investors understand how closely the ETF is trading to the value of its underlying holdings.

● Historical returns and performance: Shariah screening can result in a portfolio with a different sector and industry mix from a conventional broad-market index. Investors should therefore review performance over multiple periods.

● Expense ratio: This is the annual fee charged by the fund. A lower expense ratio can reduce the impact of costs on long-term investment returns.

● Tracking error: Tracking error measures how closely the ETF follows its underlying index. A lower tracking error generally indicates more efficient index replication.

● Liquidity: Investors should check trading volume and the bid-ask spread before buying or selling ETF units. Better liquidity can make transactions easier and potentially reduce execution costs.

● Holdings and diversification: Investors should review the ETF’s latest holdings, sector allocation and individual stock weights to understand how diversified the portfolio is.

● Shariah compliance monitoring: Check how frequently the underlying index is reviewed and how companies that no longer meet the screening requirements are treated.

● Fund size (AUM): Assets under management indicate the size of the ETF. A reasonably sized fund may have better trading activity, although AUM should be considered alongside liquidity, tracking error and expenses.

How to Invest in Shariah ETFs?

Shariah ETFs are bought and sold on the stock exchange in much the same way as listed shares. The general process is:

● Open a demat and trading account with a broker or investment platform, if you do not already have one.

● Log in to your trading platform or app and search for the specific Shariah ETF using its name or NSE/BSE ticker symbol.

● Check the live market price, NAV, trading volume and bid-ask spread before placing an order.

● Review the ETF’s underlying index and Shariah screening methodology to ensure that it matches your investment requirements.

● Place a buy order for the desired number of ETF units. Investors can use a market order or a limit order depending on their preference.

● Once the order is executed, the ETF units are credited to the investor’s demat account.

● When you decide to exit the investment, place a sell order during market hours, subject to the prevailing market price and available liquidity.

Since ETF prices move throughout the trading session, a limit order can provide greater control over the execution price, particularly when the ETF has relatively low trading volume.

Brokerage, exchange-related charges, STT and other applicable transaction costs may apply to ETF trades. Shariah ETFs generally do not have a conventional lock-in period, allowing investors to sell their units during market hours.

Shariah ETF Returns, Taxation and Risks

Historical Returns and Performance

Shariah ETF returns are primarily linked to the performance of companies that meet the screening criteria of the underlying Shariah-compliant index.

Because Shariah screening excludes certain industries and companies with financial characteristics that do not meet the applicable requirements, the ETF’s portfolio can differ considerably from a conventional broad-market index.

For example, companies involved in conventional interest-based financial services may be excluded. This can result in lower or higher exposure to certain sectors depending on market conditions.

Technology, healthcare, consumer businesses, manufacturing and other permissible industries may form a significant part of a Shariah-compliant portfolio, depending on the index methodology.

The performance of the ETF is therefore influenced by the earnings and share prices of its eligible companies, as well as the overall sector composition of the underlying index.

Investors should also understand that Shariah screening methodologies can vary. Different indices may use different business-activity thresholds and financial ratios, which can result in different portfolios and performance.

Investors should evaluate performance across multiple market cycles and understand the methodology of the specific ETF rather than comparing it only with conventional market indices.

Past performance is not indicative of future returns. Investors should check the latest ETF price, NAV, expense ratio, tracking error, holdings and screening methodology before making an investment decision.

Taxation

The tax treatment of a Shariah ETF depends on its structure and whether it qualifies as an equity-oriented fund under the applicable tax rules.

For an equity-oriented ETF, capital gains are generally taxed in line with equity investments:

● Short-Term Capital Gains (STCG): Gains on units sold within 12 months are generally taxed at 20% under Section 111A, subject to applicable conditions.

● Long-Term Capital Gains (LTCG): Gains on units held for more than 12 months are generally taxed at 12.5% under Section 112A on gains exceeding ₹1.25 lakh in a financial year, subject to applicable conditions.

● Securities Transaction Tax (STT): STT can apply to ETF transactions as prescribed under the applicable tax rules.

Tax rules can change through future Union Budgets and amendments. Actual tax liability can also depend on an investor’s overall financial circumstances, so consulting a qualified tax professional may be appropriate.

Risks

● Market risk: A Shariah ETF is an equity investment and can decline when the broader stock market falls.

● Screening risk: Shariah-compliant screening can exclude certain companies and industries, resulting in a portfolio that differs from conventional market indices.

● Sector concentration risk: The exclusion of certain industries can increase exposure to other sectors. Weakness in heavily represented sectors can therefore affect performance.

● Compliance risk: A company may stop meeting the applicable Shariah screening criteria because of changes in its business activities or financial ratios.

● Methodology risk: Different Shariah indices can use different screening thresholds and methodologies, which can affect the ETF’s holdings and performance.

● Tracking error: The ETF may not perfectly match the performance of its underlying index because of expenses, transaction costs, cash holdings and portfolio rebalancing.

● Liquidity risk: Lower trading volumes can result in wider bid-ask spreads and may affect the price at which investors can buy or sell ETF units.

● Valuation risk: Eligible companies can become expensive relative to their fundamentals, and a change in market expectations can lead to price corrections.