Ramadan is almost upon us and is usually the time when most Muslims pay their zakat for the year. To make things easier for you, we are doing a series on how to calculate zakat on different asset classes.
In this article, we will break down and demonstrate how to calculate your zakat due on any funds that you own.
This article is part of our Zakat FAQ series. You should also definitely check out our comprehensive zakat calculator.
Is zakat due on funds?
If it is an equities fund (primarily invests in stocks and shares), then yes. Your investment into an equity fund represents a proportionate ownership of all the companies in that fund. As such any zakatable assets held by the constituent companies will incur zakat.
An index fund, mutual fund, exchange-traded fund (ETF) and pension fund are all usually names used for funds primarily invested in stocks and shares.
For property and property-based sukuk funds, no zakat is due as the underlying investment is not zakatable. You will instead pay zakat on the rental income that you receive which will be in your possession as cash anyway.
What zakatable assets are in funds?
The zakatable assets in an equities funds will simply be the sum of the zakatable assets of each stock the company owns. Here’s our article on how to work this out for an individual stock. In short, you simply need to work out the proportion of liquid assets relative to the total value of the company.
For funds, this would be extremely impractical to calculate due to the large number of companies that they typically contain. Therefore the following approach is recommended.
Take 25% of the value of your investment in the fund and pay 2.5% zakat on it.
Let’s demonstrate this with a quick example. Tauseef has £4000 in the HSBC Islamic Global Equity Index Fund. All he has to do is apply 2.5% to 25% of his investment value. So he pays 2.5% of £1000. That works out to £25.
Where to calculate your zakat
So there we have it. Here is a simple zakat calculator that helps you calculate zakat on funds and lots of other types of assets and investments.