Fund Review Fund focus – Tata Ethical Fund

Fund focus – Tata Ethical Fund

Although Tata Ethical Fund is positioned as a Shariah compliant fund, we believe that this theme should not be targeted at just one category of investors.
Investment Advisory Division, iFAST Financial Jun 4, 2014

Although Tata Ethical Fund is positioned as a Shariah compliant fund, we believe that this theme should not be targeted at just one category of investors. 

Five years ago when two fund houses launched a shariah oriented ETF and a mutual fund, it was a novel theme in the domestic fund industry. For Indian investors Shariah was a new concept and the funds in this category were launched with the intention of catering to the investment requirements of a particular community. A deeper evaluation of their investment strategy over the years suggests that these funds are also an ideal fit in the multicap category with a focus on specific themes and sectors.

The term “Shariah”refers to the moral code and religious law of Islam. Shariah compliant funds mean that they will have stocks of companies which are screened on the basis of the businesses that they undertake and also their financial ratios. Activities prohibited under the Shariah law include alcohol, tobacco, gambling, interest lending businesses which include traditional banks and hotels etc. On the other hand, financial ratios refer to leverage, cash compliance and share of revenue, which is derived from non-compliant activities.

While, we have been writing on Shariah compliant funds since April 2012 we have decided to focus on a particular fund from this category which looks promising from a long term perspective.

Here, we are referring to Tata Ethical Fund which was initially launched as Tata Core Sector Fund on April 9, 1996. Initially, the fund was a close ended scheme which was converted into an open-ended fund from August 4, 1999 onwards. The fund changed its name to Tata Select Equity Fund since August 2, 2002 and restrictions were also placed on investing into certain sectors. Finally, the fund was repositioned as a Shariah oriented fund and renamed as Tata Ethical Fund on September 5, 2011.

Investment Strategy

As per the new mandate, the fund’s investment objective is to provide medium to long-term capital gains by investing in Shariah compliant equity and equity-related instruments of well-researched value and growth-oriented companies. This fund basically follows a bottom-up approach and the stocks are selected from a Shariah compliant universe.

To understand the nitty-gritty of the fund better, we had a discussion with Pradeep Gokhale who has been managing this fund since January 2, 2012. Our discussion focused on the investment strategy of the fund along with the future outlook that the fund management team sees for this fund. Before getting into the details, Gokhale made it very clear that initially the stocks are screened by a Shariah advisory firm that is Dar-al-Shariah, which is a subsidiary of Dubai Islamic Bank. The screening of stocks also involves informing the fund management team if any Shariah compliant stock has changed its status and in such cases the advisory firm will give a stipulated time to exit the particular stock.


We did a detailed analysis of the portfolio since it was repositioned as a Shariah fund. We observed that as of March 2014, the fund held around 40 stocks in the portfolio out of which 12 have been there since October 2011. Among these stocks, the average allocation in two stocks namely Infosys and Reliance Industries have been the highest that is to the tune of 6.94% and 6.62% respectively. However, an interesting observation that can be made here is that Infosys whose share in the portfolio has been in the range of 5% to 10% (October 2011- February 2014) saw a sudden dip in the allocation in March 2014 to almost 3.48%. Another stock which the fund management team seems to be very positive on is TCS which can be gauged from the increasing allocation into the same from 2.12% in April 2012 to 7.84% in March 2014. Along with these stocks, some of the other favourite picks in the portfolio have been Amara Raja Batteries, Shree Cement, Lupin, Gujarat Mineral Development Corporation and Oil and Natural Gas Corporation (ONGC) which have been a part of the portfolio during our 30 months of analysis.

Although the fund follows a bottom up approach, we thought it appropriate to analyse the sectoral trends as well. At this juncture, it is interesting to note that Software and Pharmaceuticals have been among the top 5 picks during our study period. In addition to this, the fund management team has also been betting big on Consumer Non-Durables and the average allocation to this sector has been 10.39%. In this sector, the fund which had been positive on Hindustan Unilever with an allocation of 6.03% in October 2011 exited this stock entirely in July 2013. Currently from this space, the fund manager is positive on stocks like Colgate-Palmolive (India) and Dabur India.

Our Take

Although Tata Ethical Fund is positioned as a Shariah compliant fund, we believe that this theme should not be targeted at just one category of investors. The reasoning behind this is that the fund aims at taking exposure into those companies which are not in the banking space, have low debt on their books and are cash rich. Hence, we believe that this fund with no market cap/sector bias and a nil exposure into financial stocks will stand out among the other plain vanilla diversified funds which normally have more than 20% allocation into banking stocks. There is a myth in the industry that funds with a major exposure into the banking sector will be able to perform consistently over a long time period; however, we are of the view that Tata Ethical Fund is the answer to disprove this myth. We recommend this fund to our conservative and balanced investors who wish to be a part of a strategy whose investment mantra will be to focus on socially responsible companies with low leverage but at the same time will be able to deliver consistent performance over a long period of time.

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