The Shariah Ruling on Conventional Balanced Funds
Balanced funds are one of the most established categories in global investment markets. In technical terms, a balanced fund is a single portfolio that allocates its assets between equities and fixed-income securities in a defined ratio. The most common structure is a sixty-forty model, where sixty percent is invested in equities and forty percent in bonds, though other allocations such as fifty-fifty or seventy-thirty exist as well. This blend is designed to combine growth from stocks with income and stability from bonds. It is a standard definition used across Investopedia, Morningstar classifications, and the Investment Association’s multi-asset sectors.
This structure is important because it determines how the fund earns its returns. The equity side aims to capture long-term capital appreciation. The fixed-income side, however, relies on interest-bearing instruments such as government bonds, corporate bonds, treasury notes, and similar debt securities whose return is generated through guaranteed coupon payments. The fixed-income allocation is not a miscellaneous category. It is a deliberate reliance on conventional debt to stabilise the portfolio’s overall volatility.
From a Shariah perspective, this creates a fundamental issue. The ruling on an investment does not depend on its marketing label or its diversification benefits. It depends on the legal nature of its underlying components and the source of the income it produces. When a portfolio integrates instruments whose return is generated through interest, it becomes intertwined with prohibited income in a way that is inseparable from its overall structure. The presence of riba is not confined to one corner of the portfolio. It forms part of the fund’s total return and therefore affects the character of the entire investment.
Islamic jurisprudence treats interest-based debt as prohibited in its origin. When such instruments are embedded within a portfolio, they introduce an element of unlawful income into the structure in a way that cannot be purified or isolated. The equities may be permissible on their own, but their permissibility does not override the presence of prohibited income within the same investment vehicle. As long as the portfolio depends on interest-bearing bonds as part of its design, the investment cannot be categorised as lawful.
This is why conventional balanced funds, despite their popularity and their role in global asset allocation, do not meet the requirements of Shariah compliance. Their core income-generating engine rests on instruments that produce returns through interest, and this remains true regardless of how the allocation is adjusted or how the product is branded.
In addition to the fixed-income issue, there is also the matter of equity compliance. Balanced funds do not screen their equity holdings according to any Shariah criteria. The companies included may operate in sectors that are not permissible, and they may generate a material portion of their income from activities such as conventional finance, alcohol, gambling, entertainment, defence or other prohibited lines of business. Even if the fixed-income component were removed, the absence of Shariah screening on equities would still prevent the fund from meeting Islamic investment requirements. The structure therefore encounters Shariah issues on both components of the portfolio.
Islamic multi-asset funds emerged precisely to address this gap. They follow a similar objective of balancing growth and stability, but they replace conventional bonds with sukuk, screened equities, Islamic money-market placements, and other structures that generate returns without relying on interest. This allows the portfolio to achieve diversification while maintaining the purity and integrity of its income sources.
For Muslim investors, the distinction is crucial. A balanced fund is not simply a diversified fund. It is a specific structure built on the combination of equities and conventional fixed-income instruments. Without replacing the fixed-income component with Shariah-compliant alternatives, the investment cannot satisfy the requirements of lawful income. Understanding this structure helps investors navigate the market with clarity and recognise why most conventional balanced funds fall outside the scope of permissibility, even if part of their holdings appears acceptable.
