Best Shariah ETFs in India in 2026

What are Shariah ETFs?

A Shariah ETF is a passively managed exchange-traded fund that tracks an index composed exclusively of Shariah-compliant companies. In India, the Nifty Shariah Index family forms the basis for such instruments. The Nifty 50 Shariah ETF listed in India tracks the Nifty 50 Shariah Index, which is derived from the Nifty 50 by applying a Shariah-compliance screen to each constituent.

Overview of Shariah ETF in India

1. Nippon India Nifty 50 Shariah ETF: The Nippon India Nifty 50 Shariah ETF is the only Shariah ETF currently listed on the NSE in India and the primary halal ETF available to investors through a demat account. It tracks the Nifty 50 Shariah Index, holding the Shariah-compliant subset of Nifty 50 companies in free-float market capitalisation proportions. The fund is managed by Nippon India Mutual Fund and was previously known as Reliance ETF Shariah BeES before the rebranding to Reliance Nippon Asset Management.

How to Invest in a Shariah Compliant ETF in India?

Investing in halal ETF in India is straightforward:

1. Open a demat/trading/stockbroker account. You can open a demat account with smallcase!
2. Investors can use the Tickertape Stock Screener to analyse the Shariah ETF across more than 200 parameters.
3. Place an order to buy the Shariah ETF if it matches your investment thesis.

Benefits of Investing in Shariah ETFs

• Values-Aligned Investing: Shariah ETFs allow investors who follow Islamic finance principles to invest in equities through a listed product. The ETF follows a screened index, which reduces the need for investors to manually check every stock for Shariah compliance.
• Structured Sector Exclusions: Shariah ETFs follow a defined screening process that excludes businesses linked to interest-based finance, alcohol, tobacco, gambling, and other non-permissible activities. This creates a more rule-based approach compared to manually selected halal stock portfolios.
• Exposure to Established Companies: Since Shariah ETFs usually select stocks from a large-cap universe, they offer exposure to well-known companies that meet the index’s compliance rules. The portfolio may include sectors such as technology, healthcare, consumer goods, cement, and other eligible industries.
• Exchange-Based Buying and Selling: Shariah ETFs trade on the stock exchange during market hours. Investors can buy or sell units at live market prices, subject to liquidity and order execution.
• Transparent Portfolio Structure: Shariah ETFs disclose their holdings and follow a rules-based index. This allows investors to review the portfolio, understand sector exposure, and track how the ETF is aligned with the underlying index.

Risks Associated with Investing in Shariah ETFs

• Sector Concentration Risk: Shariah screening excludes certain sectors, especially conventional financial services. This can make the portfolio more concentrated in a smaller set of sectors, increasing the impact of sector-specific underperformance.
• Index Change Risk: Shariah-compliant indices may change their constituents after periodic screening. Stocks can be added or removed based on compliance rules, which may create portfolio turnover.
• Tracking Error Risk: The ETF may not exactly match the return of the underlying index. Expenses, liquidity, rebalancing, cash holdings, and execution timing can create a difference between ETF returns and index returns.
• Liquidity Risk: Some Shariah ETFs may have lower trading volumes compared to broad-market ETFs. Lower liquidity can lead to wider bid-ask spreads and may affect buying or selling prices.
• Market Underperformance Risk: Since Shariah ETFs exclude some sectors, they may underperform the broader market when excluded sectors lead the rally. This is especially relevant when banking or financial stocks drive index returns.

Factors to Consider Before Investing in Shariah ETFs

• Shariah Compliance Criteria: Shariah compliant ETFs follow Islamic investing principles. They usually avoid companies involved in interest-based financial services, alcohol, tobacco, gambling, pork-related products, and other restricted businesses. Investors can review the ETF’s index methodology to understand how stocks are screened.
• Index Methodology: Each Shariah ETF tracks a specific Shariah-compliant index. The methodology defines which companies qualify, how often the index is reviewed, and what financial filters are used. This can affect the ETF’s sector exposure and performance.
• Sector Concentration: Shariah compliant ETFs may have limited exposure to sectors such as banks and financial services because of interest-based business models. This can lead to higher exposure to sectors like IT, healthcare, FMCG, energy, or manufacturing, depending on the index.
• Tracking Error: The ETF may not exactly match the return of its underlying index due to expenses, cash holdings, liquidity, rebalancing, and execution differences. Lower tracking error usually indicates closer index replication.
• Portfolio Fit: Shariah ETFs provide rule-based exposure to Shariah-compliant companies, but they may not give broad market exposure like a Nifty 50 or Nifty 500 ETF. Their role in a portfolio depends on the investor’s risk profile, investment horizon, and diversification needs.
• Tax Treatment: Shariah ETFs are generally taxed under equity ETF rules if they meet equity-oriented fund criteria. Tax treatment may depend on holding period, fund structure, and current tax laws.