Thursday, September 9, 2010

Mutual Funds and Usury

Last week a Muslim colleague asked me if investing in mutual funds involved usury, or the charging (or paying) of interest on loans.  He was interested in investing but was concerned because Islam prohibits all forms of charging interest.  I said that since equity mutual funds invest in shares of stock, and the profit is made on the rise and fall of prices, then that wasn't usury.  The only exception I could think of was that of the mutual fund buying shares of stock in a bank.  That could technically be interpreted as profiting from loan interest.  I also added that I wasn't an expert and that it was important to do research before investing.

After some more thought and research I realized the question and (correct) answer weren't so simple.  Bond funds and balanced funds, for example, deal in interest-bearing loans (bonds), so they aren't permissible investments.  Companies that trade in weapons, alcohol, and other prohibited products are likewise off-limits.  The subject is too broad and technical for me to discuss.  The best approach, in my opinion, would be to research and consult with financial experts and religious authorities to find a definite answer.

Investing in Mutual Funds
Mutual Funds Pros and Cons

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