Why the Muslims should invest in Equity Markets?
Every citizen should be able to take advantage of the boom in the Equity markets of the
country so that they are not left behind in the economic growth that is being witnessed
throughout the country. And it is going to last for years to come.
And in order to remain in the main stream of the economy, Equity stock markets (The
shariah way) provides the most cost effective investment solution for the Muslims.
Equity markets have proved that they are not only the most effective, transparent,
liquid and conducive to small and big size investors as a means of investment, but
history has also proved that it outperforms all other asset classes where return on
investments is the parameter considered. Hence Muslims must invest in the equity
market.
The following paragraphs below demonstrate the inherent advantage investments in
equities have over other forms of investments.
Fixed interest based investments like the saving bank deposit, Bank FDR; Postal savings,
Debentures, Bonds etc are not permitted in Islam. Hence Muslims stand to lose out and
their capital gets depleted over a period of time. Therefore, stocks (The shariah way)
are a far better option available to the Muslims.
Investment in Real estate/ properties, though permissible in Islam, has got inherent
disadvantages over equities. First, because of the unit size, it is not possible for every
individual to buy property since the cost involved is huge whereas, one can invest in
equity (the shariah way) for an amount as low as Rs. One thousand and there are no
upper limits. Secondly, property is subject to a lot of legal paper work and one has to go
through a very cumbersome procedure to acquire properties. However, it is very easy to
buy and sell shares by being a member of a Sebi registered broker. So buying and selling
shares is as easy as snapping your fingers. Finally, there is often a threat of
encroachment of the property which involves costly litigation. Equity shares have a big
advantage here since the stocks purchased get directly deposited in the investor's Demat
account where it is in the safe custody of the custodian and he can sell them whenever
and as much as he wants to sell.
Precious metals (gold, silver, platinum) investments are permitted in Islam. But from
the point of view of economics and return on investments, these precious metals can at
best beat the inflation and since they are globally traded with prices being affected by
global demand and supply, the price and value does not reflect the economic growth of
the nation. Hence, more often than not, it under performs the domestic economy
growth. And since the Indian economy is on a long term growth path, Muslims are
suggested to invest in shariah compliant stocks.
A further problem with precious metal is the warehousing because if they are not safely
stored, then it will always be susceptible to theft. Stocks are kept safely in the Demat
account held with the custodian.
One more point that goes in the favour of equity stock markets is the Capital gains tax
advantage. There is no capital gains tax for long term investors i.e. if the investment is
held for more then one year. And for the short term investments of less then a year,
investors have to pay only ten percent tax on its gains. Muslims must take advantage of
this benefit and invest in stocks that would help them create wealth in the long term
the shariah way.
There is a misconception that investment in stocks is not permissible in Islam and it is
often said that it is 'Haram'. Islamic scholars over a period of time have laid down
certain parameters for investing like the Economic activities and financial ratios. Stocks
which fulfill these parameters should be invested in by the Muslims the 'Shariah way'.
However the only disadvantage the equities have is the risk associated with them. In
order to overcome this risk, one needs to take guidance from Equity Research analysts
(shariah compliant) who can guide and advice them on what to buy and most
importantly when to buy and sell. If this part is efficiently and judiciously taken care
of, then there is no better option then equities for the Muslims
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