Fatwa ID: 1774
Title: Halal Mutual funds and 401k
Category: Financial Transactions
Scholar: Dr. Hatem al-Haj
Date: 2006-11-07
Question:
as salamu alakium, Are mutual funds halal? And are 401ks allowed? Can you do them through your own employer or should we go through an Islamic channel like AMANA mutual funds?
Answer:

All praise be to Allah, and may his peace and blessings be on the last and best prophet and messenger, Muhammad.

401ks have many financial benefits, including that your company will usually match your contributions. Thus, you may take part in them and do the following to ensure the wholesomeness of your earnings as much as possible:

If the company deals with a money management corp. that will allow you to choose AMANA or any other Islamic mutual funds, then I would choose nothing but them. If not, then I would try to have a custom portfolio, and select companies that are on the Islamic index of Dow Jones.

If that option is not available, then I would choose mutual funds that would have the least amount of financial institutions or other corporations with known forbidden transactions.

You must stay away from bonds and their likes, because they are interest based.

You will need at the time of collecting your retirement to purify the money you get, because it will likely not be completely wholesome. In this case, you may donate approximately 5-15% of your earnings to charity. The more you contribute to funds that include financial institutions or other companies with haram activities, the more you will need to donate and vice versa.

Allah knows best.