Building a Sharia-compliant investment plan

What you will learn

• Which Sharia-specific sections a written investment plan needs
• How to choose building blocks for each part of the portfolio
• How to set rebalancing rules and apply them with new contributions
• How to build an annual calendar for screening checks, purification and zakat

Explanation

Asset allocation, rebalancing and writing an investment policy in general are covered in the ETF course. This lesson adds the Sharia-specific parts and puts the whole course into one document.

Sections of the plan

1. Goals and horizon: what the money is for and when you need it. Money needed within about three years is usually not invested in shares.
2. Sharia reference: the scholar, board or standard (for example AAOIFI) you follow, and your choices on disputed points: gold or silver nisab, share valuation method for zakat, purification method, view on crypto.
3. Emergency fund: kept in a non-interest current or deposit account, ideally at a bank covered by the statutory deposit guarantee.
4. Target allocation: for example Islamic equity funds, sukuk funds, gold and cash, with percentage targets.
5. Product rules: only products with a named Sharia board and published screening method; no leverage, short selling, CFDs, futures or options; gold only physical or allocated.
6. Rebalancing rule: a tolerance band, and the order in which you act.
7. Annual calendar: screening check, purification, zakat date, plan review.

Typical building blocks

Note two side effects of screening. Islamic equity indices exclude conventional banks and highly indebted companies, so they often have a higher weight in technology and healthcare than a conventional index. This concentration can make returns differ strongly from a conventional index in either direction. Sukuk markets are smaller, and many sukuk are issued in US dollars, which adds currency risk for a euro investor.

Rebalancing with contributions

A tolerance band is the distance from the target you accept before acting, for example ±5 percentage points. When a part breaks the band, first direct new contributions to the parts that are under target. Sell only if contributions are not enough. This reduces costs and, in Germany, avoids triggering taxable gains (check with a Steuerberater).

The annual calendar

• Quarterly: check that each holding is still compliant (index providers remove companies that fail screens).
• After each distribution: record the purification amount.
• Zakat date: one fixed date per lunar year; value everything with your written method.
• Once a year: review goals, products, fees and your Sharia reference.

Worked example

Hypothetical example: Sara has a separate emergency fund of €6,000. She invests €10,000 now and €400 every month. Target: 60% Islamic equity ETF, 20% sukuk fund, 10% allocated gold, 10% cash in a non-interest account. Band: ±5 percentage points. All values are hypothetical; fees and taxes are excluded.

Step 1 – initial split: €6,000 equity, €2,000 sukuk, €1,000 gold, €1,000 cash. Monthly €400: €240, €80, €40, €40.

Step 2 – check after one year. Values: equity €10,600, sukuk €2,850, gold €1,350, cash €1,200; total €16,000. Weights: equity 10,600 ÷ 16,000 = 66.25%; sukuk 17.81%; gold 8.44%; cash 7.50%. Equity is above 65% (60% + 5), so the rule applies.

Step 3 – amounts to targets: equity target €9,600, so €1,000 over; sukuk €3,200 (€350 under); gold €1,600 (€250 under); cash €1,600 (€400 under). Shortfall total: €350 + €250 + €400 = €1,000.

Step 4 – action: she sends the next three monthly contributions (€1,200) only to sukuk, gold and cash, roughly in proportion to the shortfall, and checks again. No sale is needed.

Step 5 – zakat estimate (her written method: zakatable-assets ratio 25% for the equity ETF, full value for the rest, gold nisab): €10,600 × 25% + €2,850 + €1,350 + €1,200 + €6,000 emergency fund = €14,050. Nisab 85 g × hypothetical €100 = €8,500. Zakat = €14,050 × 2.5% = €351.25.

Common mistake

Practice activity

Hypothetical portfolio: equity €7,800, sukuk €1,500, gold €900, cash €800. Target: 60/20/10/10 with a ±5 point band. Monthly contribution: €300. (a) Calculate the weights. (b) Is any part outside the band? (c) Calculate the amounts needed to reach the targets and say how many months of contributions would close the gaps.

Key takeaways

• A Sharia-compliant plan needs a written Sharia reference with your choices on disputed points.
• Use clear product rules: named Sharia board, no leverage or derivatives, physical or allocated gold.
• Rebalance with tolerance bands and use new contributions before selling.
• Keep an annual calendar for screening checks, purification and one fixed zakat date.

Next step

If you want to apply these planning skills to running a business, continue with the course "Growing an Online Business: Marketing, Sales & Customers".