Fatwa ID: 76600
Title: Mutual funds
Category: Financial Transactions
Scholar: Dr. Main Khalid Al-Qudah
Date: 2008-10-13
Question:

Assalaamu alaikum, respected scholars, and thank you for your time.

 

I have several questions related to mutual funds:

 

1) Is a mutual fund, in principle, considered halal? Because a friend told me that they investment does not lose the principal investment even if it loses money. In other words, if you invest $1,000, you may lose your earnings above that, but not the initial investment which, as I understand, is not halal.

 

2) Is the "AMANA" fund really a Sharia-compliant mutual fund?

 

3) What is the zakat to be paid on a mutual fund? Is it 2.5%? I have heard some scholars say with regards to stocks, that they are only zakatable once you cash the money out. Is this the case with mutual funds?

 

4) I am a new Muslim, and I had a non-halal mutual fund given to me by my grandmother (it is now cashed out and in a non-interest bank account). What do I do with it regarding its earnings and zakat? I should also mention that I only had full control of the money since I the last time I was in the US and I processed the paperwork to remove the money; prior to that, I was living abroad and my mother was responsible for the fund.

 

Jazak Allah khayr.

Answer:

Trading in the stock market through mutual fund companies is basically allowed, as long as they do not guarantee you either the capital or the profit, and as long as the companies whose stocks are being traded engage in Halal business.

 

The company in question claims to conduct a Halal mutual fund, but I doubt that they have an active Sharia Advisory Board to supervise their daily activities, which might result in some mistakes in application.

 

As for the zakatability of your stocks, if your intention is to keep them for a long time and they are not for trading purposes, then you pay Zakah on the net profit you make every fiscal lunar year. If, however, you hold them for trading purposes (buying and selling), then the wholesale market value of the stocks (the market value, plus profit) is liable to Zakah. In either of the two scenarios above, the rate of Zakah due is 2.5%.

 

Whatever you earned before embracing Islam is now yours and subject to Zakah based on the 2.5% rate. As for money generated thereafter in an impermissible way, it is only preferred to get rid of this money, by donating it in full to any charitable project of the Muslim community in your area. If you need this money to use it for yourself, however, that would be acceptable, too. If you choose to do so, all of the money would obviously be subject to Zakah. Furthermore, donating more than the basic Zakah requirements is always recommended.

 

May Allah (swt) help you adhere to His commands. Ameen.