shariah compliant stocks
TRANSCRIPT
ContentsIntroduction...........................................................................................................................................2
Objectives of study................................................................................................................................4
Industry Profile......................................................................................................................................5
Company Profile....................................................................................................................................6
OUR MANAGEMENT.....................................................................................................................6
OUR ACHEIVEMENTS...................................................................................................................7
Mission..............................................................................................................................................7
Vision................................................................................................................................................7
Job Profile.............................................................................................................................................8
Shariah Compliant Stocks.....................................................................................................................9
Meaning.............................................................................................................................................9
Screening of Stocks.........................................................................................................................10
Volatility of Shariah Compliance....................................................................................................11
Equity Based Investment Options........................................................................................................12
Tata Ethical Fund............................................................................................................................12
Taurus Ethical Fund.........................................................................................................................13
S&P BSE 500 Shariah index methodology..........................................................................................14
Nifty 500 Shariah Index Methodology................................................................................................16
Nifty 50 Shariah Index Methodology..................................................................................................17
Literature review.................................................................................................................................18
Research Methodology........................................................................................................................20
Data Analysis & Interpretation............................................................................................................24
Findings & Recommendations.............................................................................................................29
Conclusion...........................................................................................................................................30
References...........................................................................................................................................31
IntroductionThe world's economic centre of gravity is gradually shifting from the established, wealthy
economies of Europe, Japan and North America to the emerging economies like China, India
and South East Asia, with China and India projected to be the largest economies of the world
in the next 50 years. Improving macroeconomic fundamentals, higher disposable incomes,
emerging middle class, low cost and highly competitive workforce, investment friendly
policies and progressive reform processes are all likely to combine to make a strong case for
India to have a larger share in the overall investment pie.
With this sound economic base and with hundreds of companies complying to the Shariah
laws, India offers a large economic opportunity for Islamic investors, who follow Shariah
investment and therefore can't invest in interest-based ventures or in Islamically unethical
ventures like tobacco, alcohol, fashion, gambling, vulgar entertainment and conventional
finances like banks and non-banking financial institutions.
Realizing the growing need of Islamic investments in India, the Indian government has
recently taken a number of steps in this direction. First, a high-level committee appointed by
the government to prepare India’s future financial structure recommended interest-free
banking for inclusion of Muslims in the financial sector. The Report draws its significance
from the fact that this is first time an Indian finance committee has said something on the
issue, which hitherto was considered quite sensitive in political circles. This is a good sign for
Islamic investments in India. Taking a cue from these gestures, Indian corporate have also
started placing themselves to capitalise on this big opportunity.
The people not conversant with the principles of Shariah and its economic philosophy
sometimes believe that abolishing interest from the banks and financial institutions would
make them charitable, rather than commercial, concerns which offer financial services
without a return. Obviously, this is totally a wrong assumption. According to Shariah, interest
free loans are meant for cooperative and charitable activities, and not normally for
commercial transactions, except in a very limited range. So far as commercial financing is
concerned, the Islamic Shariah has a different set-up for that purpose. The principle is that the
person extending money to another person must decide whether he wishes to help the
opposite party or he wants to share his profits. If he wants to help the borrower, he must
rescind from any claim to any additional amount. His principal will be secured and
guaranteed, but no return over and above the principal amount is legitimate.
Islamic banking (Arabic: إسالمية is banking or banking activity that is consistent (مصرفية
with the principles of sharia (Islamic law) and its practical application through the
development of Islamic economics. As such, a more correct term for Islamic banking is
sharia compliant finance.
Sharia prohibits acceptance of specific interest or fees for loans of money (known as riba, or
usury), whether the payment is fixed or floating. Investment in businesses that provide goods
or services considered contrary to Islamic principles (e.g. pork or alcohol) is also haraam
("sinful and prohibited"). Although these prohibitions have been applied historically in
varying degrees in Muslim countries/communities to prevent un-Islamic practices, only in the
late 20th century were a number of Islamic banks formed to apply these principles to private
or semi-private commercial institutions within the Muslim community.
As of 2014, sharia compliant financial institutions represented approximately 1% of total
world assets. By 2009, there were over 300 banks and 250 mutual funds around the world
complying with Islamic principles and as of 2014 total assets of around $2 trillion were
sharia-compliant. According to Ernst & Young, although Islamic Banking still makes up only
a fraction of the banking assets of Muslims, it has been growing faster than banking assets as
a whole, growing at an annual rate of 17.6% between 2009 and 2013, and is projected to
grow by an average of 19.7% a year to 2018.
Objectives of studyPrimary Objective:
To study performance of Shariah compliant index with respect to conventional stock
indexes.
Secondary Objective:
To understand concept of Shariah Compliant stocks.
To understand mechanism of equity based Shariah compliant funds.
To do a comparative analysis of Shariah indices and conventional indices.
To find association between Shariah compliant index and conventional stock index.
Industry Profile
While Islamic compliant investment avenues are now becoming available in most countries,
India has not seen large scale development. Other than a handful of Shariah compliant funds,
currently India offers limited options for investors looking at Shariah compliant investing.
However, this should not go to undermine the scope for Shariah compliant investment
opportunities in India.
Out of 6,000 BSE listed companies, approximately 4,200 are Shariah compliant. The market
capitalization of these stocks accounts for approximately 61% of the total market
capitalization of companies listed on BSE. This figure is higher even when compared with a
number of predominantly Islamic countries such as Malaysia, Pakistan and Bahrain. The
growth in the market capitalization of these stocks was more impressive than that of the non-
Shariah compliant stocks.
The software, drugs and pharmaceuticals and automobile ancillaries sector were the largest
sectors among the Shariah compliant stocks. They constitute about 36% of the total Shariah
compliant stocks on NSE. Further on examining the BSE 500 the market capitalization of the
321 Shariah compliant companies hovered between 48% and 50% of the total BSE 500
market capitalization.
Progress of Islamic finance in India
Company Profile
Pragmatic Wealth Management Pvt. Ltd. (PWM) founded by Mr. Imtiaz Merchant in the
year 2009 is a Shariah Wealth Management Advisory company with clear focus on Islamic
Investments. It aims to tap the hugely unexplored market of Shariah Compliant Investment.
The company is registered with Registrars of Companies (ROC). The company also has
approval from SEBI to run the stock broking business. PWM is of one of the pioneers of
Shariah Investment Services equipped with strong experts having technical expertise as well.
PWM endeavors to create awareness about investments in the “Islamic Way”, with a clear
mission to popularize the investments through social responsibility and ethics for which
PMW has developed a first of its kind magazine focusing on Islamic Finance, registered as
'Islami Tijara'.
OUR MANAGEMENT
Imtiaz Merchant- Managing Director
Mr. Imtiaz Merchant is a Commerce Graduate from Mumbai University and holds a diploma
in Marketing Management. He is a Fundamental and Technical market Analyst, with 16 years
of experience. Mr. Merchant is well-versed with the Islamic Finance Market and the Shariah
Compliance norms for investments. He has spent years of extensive efforts to understand the
principles of Islamic Finance and has been in constant discussions with Islamic Finance
scholars and experts. He has the privilege to create Shariah Compliant Stock Universe and
various investment portfolios for investment.
Ayzaz Rehman Motiwala- Director
Mr. Ayzaz Rehman Motiwala is a commerce graduate. He has 12 years of experience in stock
market. He is also part of the research team of Pragmatic Wealth Management, and is good
at picking stocks for investments based on fundamental studies. He has decent knowledge of
Islamic investments.
Abdul Rashid Ansari- Director
Mr. Abdul Rashid is a business man in leather exports. Being Director of the Pragmatic
Wealth Management Pvt. Ltd., he looks after the accounts and finance affairs of the
company. Through his contact he is instrumental in getting business for the company.
OUR ACHEIVEMENTS
Shariah Broking Services:
Our company PWM has received the Stock Broking license from SEBI vide SEBI REG.NO.
INB071490636 on July 28, 2013, and we are A.P. (Authorized Person) of Madhya Pradesh
Stock Exchange. By virtue of being MPSE member, our clients can trade in both BSE &
NSE. Our focus remains on research of the Shariah compliant companies; our past
performances have demonstrated our outperformance in terms of returns on investments
through our Advisory. We also provide online trading facilities to our trading members.
Mission
In order to achieve the above goals, the board has decided to take up immediately the
following tasks:
Create Awareness for Halal Investment Products & Services through Conferences,
Seminars, Workshops.
Encourage investments “the Shariah Way”, as this investment avenue has been proved
world over to be beneficial to investor community and the economic system.
Identify, develop and facilitate Shariah Compliant investments products.
To build a comprehensive Islamic wealth management company.
Initiate dialogue with regulatory authorities (SEBI, RBI, and IRDA) to permit Islamic
Investment, Finance and Islamic Insurance (Takaful).
To facilitate Shariah Compliant investors to tap opportunities in the Indian Equity
markets.
VisionThe goals of the company are to provide the best & cost efficient Financial Services
including Stock Broking, Advising Clients, efficient Portfolio Management Services,
Merchant Banking Services, Depository Services, and education to upcoming investors on
capital markets on the basis of Islamic Shariah.
The Company will be very strict to comply with the principles of Islamic Shariah to create an
Investor friendly financial environment for the benefit of all human beings.
Job ProfileThe two months internship was completed at Pragmatic Wealth Managament Pvt Ltd.
Internship was a training program with class room learning theme with real time stock
broking experience. Candidates were trained by educating them about the business process of
Stock Broking firm. First month of internship included class room training which educated
candidates about functioning of Financial markets.
Candididate’s learned about following functions:
Functioning of Financial Markets.
Intermediaries in Fiancial Market.
Governing bodies in Financial Markets.
Business process of Stock broking firms.
Market of Shariah Compliant Stocks.
Dealing with Investors of Shraih Compliant Stocks.
Candidates in their 2nd month of training session learned about use of computer applications
& software’s used by brokers in trading stocks. Candidates were educated about dealing with
customers or investors. Candidates learned trading functions such as placing orders,
cancelling orders, customer support & advisory.
Shariah Compliant Stocks
Meaning
The preferred Islamic investment format is equity. However equity comes along with
ownership. Hence Islamic investors have to ensure that the selected company’s activities and
structuring are not repugnant to shariah norms. Due to exigencies of modern business and
particularly the pervasiveness of interest transactions, fully shariah compliant equities are
extremely rare. So, shariah scholars have arrived at minimum compliance criteria which,
while excluding companies in gross violation, yet provide investors a reasonably wide choice
of shariah-compliant equities. The authors have reviewed and compared the norms set by
three organizations. A critical and analytical assessment of the different criteria follows.
Empirical data of the five hundred companies included in the BSE500 index of the Bombay
Stock Exchange is used to assess the impact of the different norms. Based on the empirical
results and analytical arguments and in the backdrop of an Islamic perspective, an
independent set of norms is proposed.
Shariah prohibits investments in companies which indulge in business activities prohibited by
Shariah. So, Shariah compliant stocks are those stocks whose income is not derived from
prohibited activities. Stocks are screened for Shariah compliance by using certain Shariah
screening norms. There are two steps involved in Shariah screening of stocks, Firstly,
screening on the basis of activity and secondly, financial screening. Stocks or companies
which pass both the criteria are known as Shariah compliant stocks or companies. Investment
in Shariah compliant stocks is not meant only for Muslims; socially responsible investors of
any faith could invest in these stocks as, in effect, the process of Shariah screening removes
companies deemed to be socially harmful.
There are several Shariah screening institutions which have formulated their own Shariah
screening norms under the guidance of their respective Shariah Boards. The better known
screening norms in use around the world are those of AAOIFI, Dow Jones, MSCI, S&P and
TASIS. As the article relates to Shariah compliant stocks in India, our discussion will be
confined to screening norms used in India. “Taqwaa Advisory and Shariah Investment
Solutions (TASIS) Pvt Ltd” is the leading Shariah advisory institution in India; it has
formulated norms for Shariah screening of Indian stocks, which are widely acknowledged
and accepted in the country.
Screening of StocksIn the first step of the screening process, companies which are involved in prohibited
business activities are screened out. The prohibited sectors include interest based financial
institutions such as banking, insurance, brokerage financial products and provision of fund
based financial services, manufacture, distribution and sale of potable alcoholic beverages
and narcotics, processing, distribution and sale of pork and pork related products, meat and
products of other animals killed in a non-halal manner, gambling and tobacco.
The companies which pass the business screening test are termed as “Business compliant”
and they are put through financial screening by further applying the following norms:
1. Their total interest-bearing debt (including from banks, financial institutions, public
deposits and inter-corporate deposits) and issued preference capital should not be
greater than 25% of their total assets,
2. Their interest income from all sources and 8% of interest-based investments should
not exceed 3% of their total income,
3. Their receivables and cash & bank balance should not be greater than 90% of their
total assets
The business compliant companies or stocks which qualify on the above three financial
screening criteria are termed as Shariah compliant companies. Investment in such Shariah
compliant stocks is called Shariah compliant investment.
Volatility of Shariah ComplianceAs Shariah Screening involves screening on business as well as financial parameters, there is
a possibility that a company which is compliant in the current financial year on the basis of
its latest financial report could become non-compliant when its next financial results come
into the public domain. Once a company becomes Shariah compliant (or non-compliant, for
that matter) its status generally remains unchanged for at least a year. It could happen that in
the next financial year any one or more of the different variables: Debt, Interest Income,
Cash, Receivables, Interest bearing Investments, Total Assets, Total Income could change in
such a manner that the company’s Shariah compliance status gets changed.
If overall Shariah compliance volatility is high, this could be a serious disadvantage, for
every time a stock held in a portfolio becomes non-compliant, it would need to be exited at
short notice – and possibly at a disadvantageous price. However, the volatility is low. Studies
show that volatility rate of Shariah compliance (status of Shariah compliance of a stock
changing from one year to the next) is of the order of 22% per annum.
Research done on the data of the latest five years reveals that there are more than 200
companies which have remained consistently Shariah compliant over the past five years. In
the table given below, the top (on the basis of market cap) 50 consistently Shariah compliant
companies out of those 200 are mentioned. For an investor who is looking for Shariah
compliant stocks for long-term investment, these could be beneficial. He could build a
Shariah compliant portfolio out of them for the long term with minimum risk of having to
exit from any of the selected stocks at short notice except for an underlying economic reason.
Equity Based Investment Options
Tata Ethical FundTata Ethical Fund is an open ended equity fund which invests in a diversified equity portfolio
based on principles of Shariah. The investment objective of the scheme is to provide medium
to long-term capital gains by investing in Shariah compliant equity and equity-related
instruments of well-researched value and growth-oriented companies.Up to 100% investment
in equity & equity Shariah Compliant listed, to be listed and unlisted securities of companies
and other instruments if allowed under Shariah principles.
Objective
The investment objective of the Scheme is to provide medium to long-term capital gains by
investing in Shariah compliant equity and equity related instruments of well-researched value
and growth-oriented companies.
Key Attributes:
Investments in well-researched value and growth oriented companies from Shariah
compliant sectors
Avoids investments in companies involved in activities like alcoholic beverages,
gaming/casinos, non halal food products and conventional financial institutional based
on Riba (interest)
Avoids companies with higher debt to equity ratios and thereby invests in low
leverage companies
Purification of any prohibited income on yearly basis as advised by Shariah advisor.
Taurus Ethical FundTaurus Ethical Fund is an Open Ended Equity Oriented Scheme that will invest in companies
which are in compliance with the Shariah norms. The scheme will primarily invest in Equity
and Equity related instruments. The fund is Actively Managed and invests in diversified
portfolios.
Objective
To provide capital appreciation and income distribution to unitholders through investment in
a diversified portfolio of equities, which are based on the principles of Shariah.
Key-Attributes
1st Actively Managed Shariah Compliant Fund in India
Will invest only in Listed Indian Stocks
Uses S&P BSE 500 Shariah Index Index as the Benchmark Index
The Fund allows a socially responsible form of investing and offers adequate
diversification
The Fund follows diligent and disciplined investment process with adequate risk
controls
Features
First-time opportunity for the discerning investor
Managed by a professional investment team and back tested for performance
Large universe of Shariah compliant stocks
Actively Managed Fund
The fund is also open for subscription to specific overseas investors
Repurchase of units by the scheme
S&P BSE 500 Shariah index methodology
Index Eligibility The selection universe for the S&P BSE 500 SHARIAH is defined as all
constituents of the S&P BSE 500. Only common stocks are eligible for index inclusion. The
selection universe is screened for Shariah compliance and all non-Shariah compliant stocks
are removed. The remaining Shariah-compliant stocks form the index.
Approaches: The S&P BSE 500 SHARIAH is calculated using a modified market
capitalizationweighing scheme, limiting the maximum weight of each constituent to 9% of
the index at each monthly rebalancing. The index is calculated using the divisor methodology
used in all Asia Index Private Limited equity indices. The level of an index reflects the
modified float-adjusted market value of all of the component stocks relative to a particular
base period. The modified market value of a company is determined by multiplying the price
of its stock by the number of shares available after float and weight adjustment. An indexed
number is used to represent the result of this calculation in order to make the value easier to
work with and track over time. On any given day, the index value is the quotient of the total
available market capitalization of its constituents and its divisor.
Constituent: Selection On a monthly basis, all common stocks in the S&P BSE 500 are
screened for Shariah compliance, applying the criteria detailed in Shariah Screens. Only those
constituents of the S&P BSE 500 passing the Shariah screens form the S&P BSE 500
SHARIAH. Due to the exclusion of non-Shariah compliant stocks, the S&P BSE 500
SHARIAH regularly consists of fewer than 500 constituents.
Constituent Weightings: Stocks in the S&P BSE 500 SHARIAH are weighted based on
their float-adjusted market capitalization, subject to a 9% constituent weight cap. Weight caps
are applied at each monthly rebalancing.
Timing of Changes: Additions and deletions are made to the S&P BSE 500 SHARIAH on
an ongoing basis due to corporate activity linked to changes in the underlying index. Changes
are announced two to five business days in advance and are communicated via the daily
corporate events (.SDE) file.
Additions: Once an announcement is made of an impending addition to the S&P BSE 500,
RI screens it for compliance. If the stock is found to be compliant, after approval by the
Shariah Supervisory Board, it is added to the S&P BSE 500 SHARIAH. RI also regularly
monitors the existing non-compliant stocks of the underlying index. If any of these stocks
become compliant because of changes in financial ratios or a change in business activity due
to mergers or restructuring, it is added to the S&P BSE 500 SHARIAH with notice to clients.
Deletions. All deletions from the S&P BSE 500 are deleted from the S&P BSE 500
SHARIAH on the same day. RI also conducts an on going review of existing S&P BSE 500
SHARIAH constituents for continued inclusion in the index. Additions and deletions to the
index that occur due to ongoing reviews and changes in compliance are made on the Monday
following the third Friday of each month, with advance notice to clients.
Nifty 500 Shariah Index Methodology
Eligibility Criteria for Selection of Constituent Stocks: The company's trading frequency
should be at least 90% in the last six months. The company should have a listing history of 6
months. A company which comes out with an IPO will be eligible for inclusion in the index,
if it fulfills the normal eligibility criteria for the index for a 3 month period instead of a 6
month period. Stocks that form part of Nifty 500 index and which also are Shariah compliant
will form part of this index.
Index Re-Balancing: In general, additions are made to the Shariah indices once a month,
typically the third Friday of the month, after the addition to the underlying index, if the stock
is found compliant by the Shariah norms. Index deletions may also occur at that time, if a
constituent is deemed no longer compliant by the Shariah norms. Other deletions may occur
during the month if a stock is being deleted from the underlying index. Such deletions will
occur at the same time as the deletion from the parent index.
Index Governance: A professional team at IISL manages Nifty500 Shariah index. There is a
three-tier governance structure comprising the Board of Directors of IISL, the Index Policy
Committee and the Index Maintenance Sub-Committee. Monthly shariah compliance
screening is carried out by shariah screening partner of IISL. Monthly changes are typically
given effect on third Friday of each month.
Nifty 50 Shariah Index MethodologyEligibility Criteria for Selection of Constituent Stocks: Market impact cost is the best
measure of the liquidity of a stock. It accurately reflects the costs faced when actually trading
an index. For a stock to qualify for possible inclusion into the Nifty 50, have traded at an
average impact cost of 0.50% or less during the last six months for 90% of the observations,
for the basket size of Rs. 20 Million. The company should have a listing history of 6 months.
A company which comes out with an IPO will be eligible for inclusion in the index, if it
fulfills the normal eligibility criteria for the index for a 3 month period instead of a 6 month
period. Stocks that meet above mentioned criteria and are also Shariah compliant form part of
Nifty50 Shariah Index.
Index Re-Balancing: In general, additions are made to the Shariah indices once a month,
typically the third Friday of the month, after the addition to the underlying index, if the stock
is found compliant by the Shariah norms. Index deletions may also occur at that time, if a
constituent is deemed no longer compliant by the Shariah norms. Other deletions may occur
during the month if a stock is being deleted from the underlying index. Such deletions will
occur at the same time as the deletion from the parent index.
Index Governance: A professional team at IISL manages Nifty50 Shariah index. There is a
three-tier governance structure comprising the Board of Directors of IISL, the Index Policy
Committee and the Index Maintenance Sub-Committee. Monthly shariah compliance
screening is carried out by shariah screening partner of IISL. Monthly changes are typically
given effect on third Friday of each month.
Literature review
Luther et al. (1992) on the basis of risk-adjusted measures, found weak evidence to suggest
that Islamic unit trust outperform the market. They also found that Islamic trusts are mainly
skewed towards small market capitalization and tend to invest in low dividend yield firms.
Statman (2000) found that the risk-adjusted returns of S&P 500 were slightly higher than
those of the DSI but the difference was not significant. On the other hand, DSI is somewhat
riskier than the S&P 500.
Hassan (2002) found that Dow Jones Islamic Market Index [DJIMI] returns are normally
distributed and the DJIMI has remarkable market efficiency.
Also according to the TASIS research report (2010), the Shariah 50 has outperformed the
SENSEX and the BSE 500 both. Over this period, annualized volatility for the SHA 50 was
also less than both SENSEX and the BSE 500(TASIS Research, 2010).
Ahamad and Ibrahim (2002) comparative study the risk and return trade off on Kuala
Lumpur Shariah Index (KLSI) and Kuala Lumpur Composite index (KLCI) during the
period 1999 to 2002, by Standard deviation, relative return technique, and t - test. The study
finds no significant distinction in return of both indices during three sample period.
Albaity and Ahamad (2008) investigated the performance and relationship between KLSI and
KLCE over the period of April 1999 to December 2005 in Malaysia. The study applied risk
adjusted performance measurement, causality and Johansen co integration test. They found
that there is an insignificant return difference and long run bidirectional relationship between
both indices.
Rahman,Yahya and Nasir (2010) investigated the 642 companies listed on the Bursa
Malaysia in 2006. These companies are approved Shariah’s compliant companies by the
Shari’ah Advisory Council of the Kuala Lumpur Stock Exchange [KLSE]. As for the level of
debt criterion, the results showed that 44.07% of the companies listed under the KLSESI are
highly geared. However, only 17% of the companies listed under the KLSESI were found to
be highly liquid. The results also indicated that if both criteria are compared concurrently,
only 198 out of 565 companies listed under the KLSESI conform to the criteria set up by the
DJIM.
Dharani and Natarajan (2011) compared the risk and return of the S&P CNX Nifty Shariah
index and S&P CNX Nifty index at day wise, moth wise and quarter wise during 2nd January
2007 to 31st December 2010. The study finds that there is a significance return difference
between both indices during third quarter in India. Finally, the study found that Ramalan
effect prevailed in the Shariah index during third quarter of the study period.
Dharani and Natarajan (2011b) empirically examined the risk and return of the Nifty Shariah
index and Nifty index during the period 2nd January 2007 to 31st December 2010. The
sample period is further divided into bull market period and bear market period based on the
movement of the both indices during the study period. The objective of the study is to analyse
the performance of the Islamic index and common index and to test whether any significant
difference between both indices in India. They employ Risk adjusted measurement such as
Sharpe index, Treynor Index and Jensen alpha. The t- test is used to test the mean returns
difference between both indices. The study concluded that Nifty Shariah and Nifty indices in
India are performing in a similar manner.
Singh and Das, (2013) found that the returns for the SHA 50 are not only higher, but are also
less volatile than those of the Nifty 50 in India.
Research Methodology The study is descriptive in nature.
Theoretical framework of Shariah compliant stocks was created through reference
from reliable sources.
Study was based on analysis and interpretation of secondary data.
Secondary data was extracted from BSE, NSE, TASIS & Asia index websites.
Conclusion & Findings were derived from data analysis section.
Standard Deviation
Standard deviation is a measure of the dispersion of a set of data from its mean. If the data
points are further from the mean, there is higher deviation within the data set. Standard
deviation is calculated as the square root of variance by determining the variation between
each data point relative to the mean.
In finance, standard deviation is applied to the annual rate of return of an investment to
measure the investment's volatility. Standard deviation is a statistical measurement that sheds
light on historical volatility. For example, a volatile stock has a high standard deviation,
while the deviation of a stable blue-chip stock is lower. A large dispersion indicates how
much the return on the fund is deviating from the expected normal returns.
P/E ratio:
The price-earnings ratio (P/E Ratio) is the ratio for valuing a company that measures its
current share price relative to its per-share earnings.
In general, a high P/E suggests that investors are expecting higher earnings growth in the
future compared to companies with a lower P/E. A low P/E can indicate either that a
company may currently be undervalued or that the company is doing exceptionally well
relative to its past trends. When a company has no earnings or is posting losses, in both cases
P/E will be expressed as “N/A.” Though it is possible to calculate a negative P/E, this is not
the common convention.
P/B ratio:
The price-to-book ratio (P/B Ratio) is a ratio used to compare a stock's market value to its
book value. It is calculated by dividing the current closing price of the stock by the latest
quarter's book value per share.
The P/B ratio reflects the value that market participants attach to a company's equity relative
to its book value of equity. A stock's market value is a forward-looking metric that reflects a
company's future cash flows. The book value of equity is an accounting measure that is based
on the historic cost principle, and reflects past issuances of equity, augmented by any profits
or losses, and reduced by dividends and share buybacks.
Correlation:
Correlation, in the finance and investment industries, is a statistic that measures the degree to
which two securities move in relation to each other. Correlations are used in advanced
portfolio management. Correlation is computed into what is known as the correlation
coefficient, which has value that must fall between -1 and 1.
Total returns:
The total return index is a type of equity index that tracks both the capital gains of a group of
stocks over time, and assumes that any cash distributions, such as dividends, are reinvested
back into the index. Looking at an index's total return displays a more accurate representation
of the index's performance. By assuming dividends are reinvested, you effectively account
for stocks in an index that do not issue dividends and instead, reinvest their earnings within
the underlying company.
Price returns:
Price indices are calculated using the price performance of constituents and it completely
ignores the dividend payouts by companies. On the other hand, total return indices include
the dividends while calculating the index performance. Total return indices account for
ordinary cash dividends and are generally applied on the ex-date. Regular cash distributions
are generally not considered in price return indices, except for capital repayments and special
dividends which are deemed extraordinary. We can break up the return coming from total
return index in two components – price index performance and performance impact due to
dividend.
Total return index performance = Price index performance + performance impact due to
dividend
Dividend Yield
A financial ratio that indicates how much a company pays out in dividends each year relative
to its share price. Dividend yield is represented as a percentage and can be calculated by
dividing the dollar value of dividends paid in a given year per share of stock held by the
dollar value of one share of stock. The formula for calculating dividend yield may be
represented as follows:
Beta:
Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in
comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM),
which calculates the expected return of an asset based on its beta and expected market
returns. Beta is also known as the beta coefficient.
Beta is calculated using regression analysis. Beta represents the tendency of a security's
returns to respond to swings in the market. A security's beta is calculated by dividing the
covariance the security's returns and the benchmark's returns by the variance of the
benchmark's returns over a specified period.
Data Analysis & InterpretationHistorical Performance of S&P BSE Shariah 500 & S&P BSE 500
According to historical data S&P BSE Shariah has underperformed compared to the
benchmark index. From the year 2009 to 2013 the BSE Shariah 500 could not outperform the
bench mark index but from the year 2014 the performance of S&P Shariah improved and till
the year 2016 the BSE Shariah index has been a better performer out of the two.
Performance of S&P BSE Shariah 500
Comparing total returns of both indices we can observe that S&P BSE Shariah index has
been the under performer except 5 years annualized returns. Total annualized returns of S&P
BSE Shariah are 16.94% while benchmark index generates 15.12% annualized total returns.
Similar situation can be observed while comparing the Price returns of both indices. The S&P
Shariah index is better performer in 5 years annualized returns.
Risk & Risk Adjusted Returns of both indices
The risk carried by S&P BSE Sharia index is comparatively lower than benchmark index.
This is obvious considering that the returns are also comparatively lower as we observed in
data describing performance of both index.
Comparing Risk and Return of Nifty 50 & Nifty 50 Shariah
Nifty 50 Nifty 50 Shariah
Nifty 50 is parent index of Nifty 50 Shariah. In long term Nifty Shariah index indicates lower
standard deviation. The index is less volatile compared to the parent index as the Beta is
lower than 1 in both 1 year and 5 year period. Stocks in Nifty 50 are overpriced compared to
the shariah index as the P/E is higher.
The dividend yield of Nifty 50 Shariah is 1.27 which is 0.05% higher than the parent index.
Returns of Tata Ethical Fund compared to Nifty 500 Shariah & Nifty 50
Tata Ethical fund which incorporated in 1996 was compared with its benchmark index nifty
50. Tata Ethical fund generated income 3 times more than its benchmark.
Findings & Recommendations
Comparison of Shariah indices with benchmark indices indicates that both have similar
movements overtime within similar economical environment.
During the period of 1 year, 3 year & 5 year shariah based indices have never
underperformed the benchmark index.
The returns of shariah compliant stocks are lower compared to conventional stocks which is
due to lower risk involved.
Shariah funds managed by private institutions generate high returns thus investors should
consider it as their investment options.
Investors seeking investments in high growth stocks & are knowledgeable of screening norms
can identify shariah compliant stocks and invest.
Shariah complaint stocks are less affected by financial crisis as they carry less leverage.
Conclusion
Considering the fact that shariah based equity has similar behaviour to conventional
equity options we can conclude that shariah based equity can be forecasted for
investments as there is no unfamiliar phenomenon.
Shariah compliant equity is not limited to muslim investors but it is an investment
option suitable for all communities.
Shariah compliant equity in most cases have either given suitable returns or
outperformed the conventional equity markets thus it is more efficient.
Market of Shariah compliant stocks is comparatively small but it holds considerable
amount of potential.
Promoting Shariah Compliant stocks as an open ended scheme for all communities
will boost the growth of market.
References
A Study of the Movement of BSE-TASIS Shariah 50 Index in accordance with Sensex by Dr.Anuj Kumar Tyagi, Mohd.Rizwan
Islamic Finance in India what is the Future Potential by Soumik Majumdar
Islamic Finance: Instruments and Markets (QFINANCE: The Ultimate Resource) : Bloomsbury Information Ltd
Indianmoney.com/how/islamic-investment-opportunities-in-india
Market for Islamic Finance in India by Dr. Shariq Nisar
Nifty 50 Factsheet
Nifty 50 Sharia Factsheet
Tata Ethical Fund Factsheet
Taurus Ethical Fund Factsheet
www.wealthcity.in/scope-of-islamic-investment-in-indian-equities-india-stock-market
www.sensageonline.com/islamic-investments