What are sharia-compliant investments and how should I save for a rainy day?

Q: I have just started working and want to start saving as soon as possible. I am looking for responsible investment options, specifically shariah-compliant investments. Can you please explain the make-up of a shariah-compliant fund and do you know if there are any exchange-traded fund (ETF) options? — Amina D, via email.

Abdulazeez Davids, portfolio manager of Kagiso Islamic Funds managed by Kagiso Asset Management, responds:

A: A shariah-compliant unit trust fund is a collective investment scheme that requires all investments in the fund to adhere to Islamic law or shariah requirements.

These requirements are underpinned by Islam’s prohibition on charging interest and the avoidance of companies with more than 30% debt or cash as a percentage of the company’s total assets as well as any companies or investments that engage in activities that are deemed to cause social harm, for example gambling, alcohol and weapons manufacturing.

Sharia-compliant equity unit trusts would typically invest in equities that comply with the above requirements. In addition, sharia-compliant balanced funds provide a shariah-compliant retirement or pension fund investment that invests in shariah-compliant equities as well as sukuks (also referred to as Islamic bonds) that pay profit instead of interest. Most SA shariah-compliant equity and balanced funds invest in both local and global equities. 

There is a sharia-compliant ETF — Newfunds Shariah ETF offered by Absa — on the sharia-compliant shares in the JSE top 40 index. The ETF is very concentrated, with only 15 equity investments.

As a savings option, most unit trusts offer a R500 a month debit order option.

Saving for a rainy day

Q: I recently sold a motorbike for R50,000 and would like to invest this money for a rainy day. My retirement savings are up to date and I do not have any debt, so I thought of investing in the new cellphone data provider Rain as it seems like a business that is likely to take off. Do you think this is a good idea? – John, via email.

Peter Hewett, MD of Hewett Wealth, answers:

A: The allocation of the proceeds of your motorcycle to one share would generally not be a great idea purely because it would expose your funds to the performance of a single company, which exposes your investment to a high level of risk.

It would make more sense to allocate your funds to a unit trust investment or an exchange-traded fund (ETF) that offers you cost-effective exposure to a far broader range of underlying investments and asset classes managed by an investment professional.

There is a very wide variety of investment options incorporating varying levels of exposure to local and offshore bonds, equities, cash and other instruments and it would make sense for you to approach an appropriately qualified financial adviser to guide you on the most suitable alternatives for you, based on your specific financial circumstances, needs, tax position and risk appetite.