Beginners' Guide to Shariah-Compliant Investing
Putting money aside in a bank account isn’t the best way to achieve financial security in the future.
Interest rates offered by banks aren’t enough to beat inflation rates, so maybe it’s time to take things a step further and consider investing.
To put things in perspective, if you conservatively invested $10,000 at 3.5% p.a. in the year 2000, it will now be worth more than $20,0000. Whereas if you kept the money idle in the bank it would just be worth $6,500!
What is investment in simple words?
The term investment refers to acquiring a specific asset or item with the aim of generating income or appreciation.
When purchasing goods with the intent of investing, the goal is not to consume the goods now but rather use them in the future to create wealth.
What Makes Investing Important for Everyone's Consideration?
Investing allows you to take charge of your financial security by growing your wealth and generating an additional income stream ahead of retirement. If you’re not investing, you’re missing out on a lot of opportunities.
What Are the Benefits of Early Investing?
Being young is no excuse for not investing; you are never too young to invest.
The small amounts of money you invest now will bring more money to your pocket in the future.
When you start investing as soon as possible, you’ll reap substantial benefits such as:
1. More recovery time
Every investment comes with a risk; investment and risk both go hand in hand. When you start investing early on and suffer a loss, you have more time to make up for that loss. Another upside to investing at a young age is that your investment has more time to grow in value.
2. Time value of money
If you commit yourself to make early regular investments, you can enjoy huge benefits at retirement due to compounding returns and giving money enough time to grow.
3. Secured future
Tough times and emergencies are inevitable, and with them come unavoidable expenses. However, early investments might help you get through the tough times by yourself without seeking financial support.
4. Supporting your retirement plan
Reaching financial stability at a young age can be a dream come true when you start investing as soon as possible. It’s better to start saving for your retirement during your 20s rather than your 40s.
What Is an Investment Strategy?
Before selecting the type of investment to make, you need to decide on your investment strategy.
It is a term used to describe an investment approach. To put it another way, it’s a plan for choosing financial vehicles based on the investor’s needs, goals, risk tolerance, specific interests, and time horizon.
Having an appropriate investment strategy gives the investor the ability to make better and more informed decisions about the types of investment to make.
How to Choose the right investment strategy to your needs?
Choosing an investment strategy depends on answers to the following questions:
What are your long-term financial goals?
Try to visualize the big picture and determine the goals that you’d like to reach after several years or even decades.
Maybe you want more money in the future to face your expenses during retirement. What about starting your own business or preparing for your children’s college tuition?
What is the kind of return needed?
The kind of return you need from your investment portfolio determines whether you’ll go for a conservative or aggressive investment strategy.
What is your risk tolerance?
Think about the amount of risk or the degree of uncertainty you are able to handle before making any investment decision. The higher the return you’d like, the more risk you must take.
What are your constraints?
Everyone has their values and moral constraints. Someone might not consider investing in companies working in specific sectors like tobacco or alcoholic beverages, another might not mind investing in these sectors.
What are the different Types of shariah compliant Investment?
After you have chosen your investment strategy, it is time to consider different types of investments.
1. Shariah-Compliant Bank products (Islamic saving accounts and certificates of deposits)
Islamic saving accounts pay you profit on your cash balance.
Risk-averse investors who want to avoid the risk of losing their money can consider Islamic saving accounts, especially if they need cash in the short term.
However, the profit earned on these accounts seldom beats inflation.
Islamic certificates of deposit (ICDs) provide higher profits compared to saving accounts, but you cannot withdraw the money for a specific period without penalty.
When you buy stocks of a specific company, you become a shareholder and have a claim on the company’s asset in case of liquidation, but you don’t own the assets.
Investing in stocks offers investors the potential of earning dividends. However, the market’s volatile nature means that returns are never guaranteed.
An instrument with bond-like characteristics that generates predictable income (yield) until maturity.
Sukuk represents a share of ownership of the underlying asset used by the issuing company.
Sukuk holders have the right to profits, but they might bear losses if the underlying asset under perform . Sukuks generally have a minimum ticket size of $200,000 which make it inaccessible for many retail investors
What are the available options for alternative investments?
1. Real estate
Buying a residential or commercial property and renting it is a good source of regular income, and property can appreciate over time. However, dealing with tenants can be tedious, and they might inflict potential damages to the property.
2. Gold and silver
Precious metals like gold and silver serve as a hedge against market volatility and economic crisis. Although they can be quite volatile, they store wealth well over the long term.
Keep reading: Investment in Gold as an Asset Class
Cryptocurrencies are a form of digital currency. They utilize cryptography to regulate the generation of units of currency and verify the transfer of funds.
Transactions are made over the P2P network and are recorded on a public ledger (blockchain). Notable examples are Bitcoin, Ethereum, Lite Coin and many more.
Given that some crypto currencies are in limited supply, investors with a higher risk appetite buy into them with the believe that they will appreciate in value as crypto becomes more widely adopted.
For the Sharia conscious investor, the Sharia compliance of each token needs to be considered before making a commitment.
Peer to peer platforms is a relatively new asset class which generally offers an equity or a debt-based investment.
Equity crowdfunding is intended to offer investors capital appreciation whereas debt-based crowdfunding offers investors a yearly yield.
The most widely crowdfunding platforms are debt-based with a focus on SMEs, like Funding Souq. The Sharia-compliant nature of the platform comes from a commodity Murabaha structure that is also known as Tawaruq.