Most Muslim investors want the same thing: to grow their savings without compromising their faith. With good intentions, it is still easy to go wrong. Here are five mistakes we see often, and what to do instead.
1. Trusting a label without checking
A company that sells permissible products can still carry heavy interest-bearing debt or earn meaningful interest income, and a fund with "ethical" in its name is not necessarily Shariah-compliant. Look for a clear screening basis: the business activities it excludes and the financial ratios it applies. Shariah indices and the funds that follow them publish these rules. Screening results also change as companies change, so check again from time to time.
2. Forgetting purification
Even a compliant company may earn a small amount of impermissible income, such as interest on its bank deposits. Many scholars hold that the matching share of your dividends or gains should be given to charity, without expecting any reward for it. Keep a note of what you receive so you can do this each year.
3. Using borrowed money on interest
Margin accounts and loans used to buy investments usually carry interest, and riba is prohibited regardless of how halal the investment itself is. Invest money you actually have.
4. Acting on tips and hype
Buying on a tip from a stranger, a group chat or a trending post is how many people end up in speculation that looks a lot like gambling, and in investments they do not understand. In many countries only registered advisers may give personal investment advice. Understand what you own and why you own it.
5. Forgetting Zakaat
Investments count towards your zakatable wealth. Choose a Zakaat date, value your holdings on it each lunar year, and pay 2.5% of your total once it is above the nisab. Our guide to calculating Zakaat on shares explains the approaches scholars take.
A simple checklist
- Is the business permissible, and are its ratios within a recognised screen?
- Am I buying with my own money, without interest?
- Do I understand what I am buying?
- Have I noted income to purify and holdings for Zakaat?