You have probably heard the term ‘halal investing' by now, it is a great sign that Muslims are maturing financially. Knowing what halal investing is has encouraged more and more of us to turn to it to grow our wealth in line with the principles of Islam.
Preserving wealth is an integral part of the Maqasid (higher objectives) of the Shariah and this further emphasizes the importance of growing our wealth effectively.
In an economic climate where inflation is rampant (see here for our thoughts on this), it has arguably never been a more important time to invest.
In this article, we outline ten golden rules for halal investing, providing a guideline for how you can align your financial goals with your faith.
1. Invest in Halal Only
Let's just get this out of the way. Your investments must be halal. There are no two ways about it. We’ve done a whole piece on why halal investing matters here. In short, you want to please Allah SWT, (avoid haram), attract barakah to your investments and positively impact the world. Investing in halal is the bedrock of everything you will do.
If you’re unsure whether a potential investment will be halal or not, let us know! Email us at firstname.lastname@example.org and we’ll reply to every single email.
2. Make the Right Intention for Halal Investing
Start with the right intention. It’s a well-known principle in Islam that you are rewarded for your intentions.
"Actions are but by intentions, and each man will have but that which he intended.” (Sunan an-Nasa'i 3437)
Having the right intention will allow you to make more purposeful decisions and attract barakah into your endeavours. If you intend good and it doesn’t work out, there is still merit in this as per the below hadith.
“Whosoever intended to perform a good deed, but did not do it, then Allah writes it down with Himself as a complete good deed. And if he intended to perform it and then did perform it, then Allah writes it down with Himself as from ten good deeds up to seven hundred times, up to many times multiplied...” (Sahih al-Bukhari 6491)
There are many noble intentions for investing, from providing for your family to supporting businesses that positively impact the world. For further inspiration, check out the article on why halal investing matters that we referenced above.
3. Only Invest What You Can Afford To Lose
You should never invest more than you can afford to lose.
The first thing you should do is create an emergency fund. This should cover 3-6 months worth of your expenses. This means that you’re covered if you’re ever in a short term financial emergency.
If you have any debts, prioritize paying them off. This is particularly true if these debts are interest-bearing. You want to get out of haram situations as soon as possible and economically, repaying interest slowly over time affects your ability to invest in the long term.
Never invest using credit cards or any other loaned money. Investments can go up or down and investing borrowed money could be disastrous.
4. Know How Much Time You Have Before Investing
There’s also a time component you must consider before investing; this is called an investment horizon. It refers to how long you plan to hold an investment before selling.
Understanding your investment horizon is critical to investing successfully, as it informs what type of investments you can make. For short-term goals (such as a holiday), you should look for low-risk investments. But if you're saving for long-term goals, you can choose riskier investments that have a chance to grow a lot over time.
You should ideally have at least a 3-year investment horizon. This gives your investment enough time to generate a return and makes it less likely to be impacted by short-term market fluctuations. The longer your investment horizon, the better it will be for you, as you can ride out adverse market conditions.
Investing for the long-term will also be better for your mental health as you can let your investments work for you without worrying about the short-term impact.
5. Diversify your Investments
Make sure to diversify your investments. You want to spread your investments across various asset classes and sectors to avoid the dangers of over-concentration.
For example, if all of your investments are in property and the property market crashes, your entire portfolio will be in trouble.
Instead, allocating capital across various Shariah-compliant asset classes, such as gold and stocks, is important. This is safer because it's less likely that all of your investments will face problems simultaneously. The key is to look for asset classes that are uncorrelated to each other.
In addition to diversifying across asset classes, it is also essential to diversify within each category. For example, consider investing in companies from different industries and geographic locations when investing in stocks. This approach further minimizes risk by reducing the impact of downturns in specific sectors or regions.
6. Know Your Risk Appetite Before Investing
Before investing, you need to be honest about how much risk you can tolerate. All investments have an associated risk, but some are riskier than others. Your risk appetite should dictate your investment decisions.
Risk appetite varies from ultra-conservative, where your primary aim is to avoid making losses. This is where you would invest in dull, safe investments that are unlikely to go down but offer a small return. For example, gold is a well-known safe investment option but may not yield astronomical returns compared to other investments.
On the other end of the spectrum, you have ultra-aggressive investments with the potential to make a great return. However, these investments can also lose all of your money. If you cannot tolerate the idea of potentially losing money, you should stay clear of these investments.
Understanding risk can help protect you from scams. Scams often offer high returns with minimal risk, contradicting the basic idea of investing - higher rewards entail greater risk.
They exploit investors' desire for quick profits, but remember, an investment that seems too good to be true often is. To spot scams, you need to thoroughly research investments which brings us nicely to the next rule. Remember, just because an investment might be right for someone you know doesn’t mean that it will be right for you.
7. Do Your Homework Before Halal Investing
You are a steward of the wealth that Allah SWT has entrusted you with. As such, you will be questioned on how we managed it.
This means doing your research before investing. As Warren Buffett, the legendary investor, says: "The first rule of investing is to never lose money." This is in line with Islam, where we have been warned not to squander our wealth:
“Those who squander are the brothers of Satan, and Satan is most ungrateful to his Lord.” (Qur’an, 17:27)
Doing your homework isn’t just limited to researching your investments. You also need to be wise with how you invest. For example, countries such as the UK and the US offer tax-efficient ways for people to invest.
In the UK, investors can invest from an ISA (individual savings account), where all returns will be tax-free. Opportunities such as these are not to be missed out on and can supercharge your investments.
8. Purify Your Investments
Don’t forget to purify your investments. Zakat is a divinely ordained purifier of wealth and must be paid. This is essential as withholding Zakat could lead to a grave punishment.
“And let not those who [greedily] withhold what Allāh has given them of His bounty ever think that it is better for them. Rather, it is worse for them. Their necks will be encircled by what they withheld on the Day of Resurrection.” (Quran 3:180)
Besides Zakat, your investments could be subject to other forms of purification. There is a general consensus that scholars have allowed Muslims to invest where up to 5% of their revenue may come from impermissible sources, on the principle that the proportionate share of earnings of that investment are donated to charity.Scholars also recommend giving a little extra in Sadaqah in these cases also.
9. Pray Istikhara Before Investing
Before making investment decisions, you should pray the istikhara prayer. Istikhara is a prayer for seeking guidance from Allah SWT for a decision.
Before praying Istikhara, do your due diligence in assessing the situation and seeking advice from trusted sources. Then, perform this prayer, seeking Allah SWT’s guidance and ultimately goodness in your decision from Allah SWT if it is the best for you
There’s also a shorter version you can recite if you are pressed for time.
اَللّٰهُمَّ خِرْ لِيْ وَاخْتَرْ لِيْ. Allaahumma khir li wakhtar li
“O Allah, choose and select for me [the better of the two things]” (Tirmidhi)
This should be incorporated into your decision-making process for all matters and not just money. Dua is a powerful tool of the believer and we’d be remiss not to take advantage of it.
As Allah SWT says in the Quran, He will respond to the prayers of his servants.
📣 “When My servants ask you ˹O Prophet˺ about Me: I am truly near. I respond to one’s prayer when they call upon Me. So let them respond ˹with obedience˺ to Me and believe in Me, perhaps they will be guided ˹to the Right Way˺.” (Quran 2:186)
10. Giving to Charity helps when Halal Investing
Investing is done to earn a return. Allah SWT directly tells us the secret to earning more in the Qur’an.
“Who is it that would loan Allah a goodly loan, so He may multiply it for him many times over? And it is Allah who withholds and grants abundance, and to Him you will be returned.” (Qur'an, 2: 245)
To increase your wealth in this life and the next, simply donate to charity. Every time you invest, you could donate a portion to charity. Alternatively, you could donate a part of any profits you make. However you choose to do it, donating something in the path of Allah SWT is a guaranteed investment.
Bonus rule: Be grateful
Be grateful for your blessings.
A hidden advantage to being grateful is that it helps shield you from greed, which is damaging to investing. Greed can lead to poor investment choices. When you appreciate what you already have, you're less likely to put yourself in harm's way by pursuing investing with this kind of mindset.
“If you are grateful, I will certainly give you more. But if you are ungrateful, surely My punishment is severe.” (Qur’an, 14:7)
Just remember that though the rules outlined in this article can help you become a better investor and increase your impact on the world, remembering Allah in your transactions and investment decisions will surely lead you to the success that really matters.
How can you get started?
Wahed allows Muslims to invest their money in a diversified, low-cost and most importantly shariah-compliant way. We do this by investing your money into different investments that are matched to you, and that you feel comfortable with. Just choose your desired risk level and we’ll handle the rest.
Since 2017, Wahed has already helped 300,000 Muslims across the world to grow their wealth in a way that is in line with their faith and values.
You can join them and get started here.