Investors who seek to create wealth on basis of a concept called VAME (Value, Attitude, Morality and Ethics) find Indian stock market attractive. VAME is like an iceberg where 10% of the persons behavior is known and 90% of it is not known.
Values provide harmony, social integrity, shape personalities and build character. Attitudes direct the behavior. What values we learn in childhood becomes the attitude. Morality is based on right or wrong and is derived from spiritual principles, general guidelines framed by society. Ethics is applicable to business chosen by individuals who govern their life.
Our Ethical View of Wealth
- All wealth belongs to creator.
- Money by itself is not wealth. Wealth results from formation of real productive goods and services, which can be measured in terms of money value.
- Money is neither an asset nor a commodity but a means of exchange. Lending money on rent is an economic peril. Farmers suicide, rich getting richer, compounding interest rates, interest rate fluctuations are making economists to believe in interest-free economics.
- Wealth in our hands is a test or trial.
- Poor and need have a right on our wealth.
- Earnings should be legitimate.
- Capital and assets should be preserved through risk management.
Ethical investment or shariah-compliant investment looks at moral consequences in financial transactions. It ensures that contracts are just and equitable for all parties involved and rewards should be related to effort, responsibility and risk sharing. The fundamental principles of ethical investment prohibit interest, excessive uncertainty, gambling and harmful businesses. It encourages risk sharing and products and services based on public need or necessity.
What it means for investors in stock trading is “NO” to margin trading, derivatives, short selling, futures and options which takes away much of the steam in the market activities. An ethical investor will engage in cash segment and delivery-based trading. This also means that he or she will be participating 100% in 2% of the market products and activities.
A check for availability of stocks which conform to sharia-compliance reveals that more than 1300 stocks listed on the Indian markets pass the test. Sharia-compliance status of stocks is subject to change based on an analysis of financials from time to time. Our studies showed that there are more than 400 stocks which are sharia-compliant on a continuous basis for 5 years.
The screening criteria used under Islamic principles differ all over the world due to different methodologies adopted by a school of thought. However, fundamentals remain unchanged across the globe. The criteria followed by TASIS a leading consulting firm in India is given below:
Business Screening: The first screening filters companies dealing in activities related to financials, pork, alcohol, gambling, pornography, tobacco, trading of gold and silver as cash on deferred basis.
Financial Ratios:
Debt to Total Assets <=25%
Interest Income + 8% of interest-based investment to total income <=3%
Cash + Receivables to total assets <=90%
A further study showed that there are more than 260 ZERO DEBT stocks diversified across different sectors which include IT, Agro, Auto, FMCG, Retail, Energy, Pharma, Textiles, Chemicals, Commodities, Infra & Construction, Telecommunication& Broadcast, Consumer Durables, Financial Services and Engineering & Capital Goods.
While the universe of stocks may be large the company size or market capitalization and liquidity is a basic determinant for investors interest. We found a reasonable availability in all the above sectors based on classification of large, mid and small cap as defined by Association of Mutual Funds in India.
Our analysis tells that investors can discover high return stocks at low prices from all sectors using both fundamentals and technical. A sample of our selection is illustrated below:
If “Passive Investing” is the new mantra of advisors, we applied “Buy it and Forget it” strategy to see the performance of a portfolio with 40 such stocks and the results was something which will raise the eyebrows of seasoned fund managers.
An amount of Rs100,000 was invested in each of the stocks on a fixed date with no trading or booking of profit strategy for 10 years and found that an investment of Rs. Xxx xx lakhs made on DDMMYYYY had grown X times showing an XIRR of XX%. The XIRR of individual stocks varied from XX% to XX%. None of the stocks in the portfolio (click the link) showed a loss over 10-year investment period.
