Zakat on Mutual Funds
The question of Zakat on mutual funds confuses many Muslims who invest through Vanguard, Fidelity, Schwab, or other platforms in index funds, actively managed funds, or target date funds. Do you pay Zakat on mutual fund holdings? How do you value index funds like S&P 500 funds or total stock market funds for Zakat calculation? What about bond funds and money market funds? Should you calculate Zakat based on cost basis or current Net Asset Value? How do capital gain distributions and dividend distributions from mutual funds affect Zakat? What if you contribute monthly to mutual funds through automatic investment plans? This comprehensive guide answers every question about Zakat on mutual funds with complete clarity for Muslim investors.
The critical truth about Zakat on mutual funds is this: mutual fund investments are zakatable wealth that must be included in your annual Zakat calculation when your total wealth exceeds nisab for one complete lunar year. You value mutual funds at current Net Asset Value on your Zakat date and include that value with all other zakatable assets for a comprehensive calculation. This guide explains exactly how Zakat on mutual funds works, why cost basis is irrelevant for Zakat purposes, how to handle index funds versus actively managed funds, bond fund prohibition in Islam, and the correct Islamic method backed by authentic Quranic and Hadith evidence specifically applied to modern mutual fund structures.
Critical misconception: Mutual funds are NOT exempt from Zakat
Many Muslim investors mistakenly believe that because mutual funds are pooled investment vehicles managed by professionals, or because they hold the funds for retirement, they do not owe Zakat on mutual fund holdings. This is completely incorrect. Mutual funds are investments you own. Whether the fund is an S&P 500 index fund, total stock market fund, international fund, or actively managed fund, the shares belong to you and represent zakatable wealth. The fact that hundreds or thousands of stocks are held inside the fund structure does not exempt you from Zakat obligation.
If you have been excluding mutual funds from your Zakat calculation, you have been underpaying your Islamic obligation and must correct this. Read this complete guide to understand the correct method for Zakat on mutual funds according to authentic Islamic scholarship applied to modern pooled investment structures.
Understanding
What mutual funds actually are for Zakat purposes
Understanding the nature of mutual fund investments clarifies why they are zakatable assets.
Mutual funds are ownership of zakatable assets
When discussing Zakat on mutual funds, you must first understand what mutual fund ownership represents in Islamic terms. A mutual fund is a pooled investment vehicle where your money is combined with money from thousands of other investors, and a professional manager uses this pool to buy stocks, bonds, or other securities. When you buy mutual fund shares, you become a proportional owner of all the underlying assets the fund holds. For equity mutual funds holding stocks, you own fractional shares of hundreds or thousands of companies through the fund structure.
From a Zakat perspective, mutual fund shares represent wealth you possess. The shares have measurable value expressed as Net Asset Value per share. You can sell these shares and convert them to cash at any time during market hours. This makes mutual funds liquid zakatable wealth, similar to owning individual stocks directly. The pooled structure and professional management do not change the fundamental fact that you own investment assets with current market value. Islamic scholars agree that such investment holdings are subject to Zakat when total wealth meets nisab and completes hawl.
How mutual fund ownership works for Zakat
You invest $10,000 in Vanguard Total Stock Market Index Fund (VTSAX). You receive approximately 76.9 shares at $130 per share NAV. The fund holds over 3,500 individual stocks representing the entire US stock market. Your 76.9 shares mean you own a proportional slice of all 3,500+ stocks. For Zakat on mutual funds, you do not track the 3,500 underlying stocks individually. Instead, you simply value your 76.9 shares at current NAV. If NAV rises to $145 over the year, your holding is worth 76.9 × $145 = $11,150.50. This total value gets included in your zakatable wealth calculation on your Zakat date.
Net Asset Value is current market worth
Net Asset Value (NAV) is calculated daily for mutual funds by taking the total value of all assets the fund holds, subtracting liabilities, and dividing by total shares outstanding. NAV represents the per share price you would receive if selling today. For Zakat on mutual funds, NAV is the valuation metric you use. When your Zakat date arrives, you check the current NAV of each mutual fund you own, multiply by shares held, and that gives you the current market value to include in zakatable wealth.
This is directly comparable to valuing individual stocks at current share price. The pooled structure makes no difference. Whether you own 100 shares of Apple directly valued at current stock price, or you own mutual fund shares that themselves own Apple stock valued at current NAV, both represent current market value of equity investments. Both are zakatable. Learn more about valuing different investment types in our Investments guide.
Annual calculation for mutual fund wealth
Calculate Zakat once per year on total mutual fund value at NAV
Stop worrying about daily NAV changes. Use the Islamic annual method on your Zakat date.
Calculate Your Zakat →Fund types
Index funds, actively managed funds, and fund categories
How to properly handle different mutual fund types when calculating Zakat.
Index funds track market indexes and are zakatable
Index funds are the most popular type of mutual fund for long term investors. These funds track specific market indexes like the S&P 500, total US stock market, international developed markets, or emerging markets. Vanguard S&P 500 Index Fund (VFINX/VOO), Vanguard Total Stock Market (VTSAX/VTI), Fidelity 500 Index (FXAIX), and Schwab Total Stock Market (SWTSX) are common examples. For Zakat on mutual funds, index funds are unquestionably zakatable because they hold equity stocks representing ownership in companies.
Calculate Zakat on index funds by checking current NAV on your Zakat date. If you own 250 shares of an S&P 500 index fund with NAV of $425 per share, your holding is worth 250 × $425 = $106,250. Include this $106,250 in your total zakatable wealth along with cash, other investments, gold, and any zakatable assets. The fact that the fund passively tracks an index rather than being actively managed makes no difference for Zakat purposes. Both represent equity ownership, both are zakatable.
Example: Total stock market index fund Zakat
Your Vanguard Total Stock Market Index Fund holding: 412 shares. Current NAV on your Zakat date: $118.50. Total value: 412 × $118.50 = $48,822. You also have $12,400 in checking, $8,600 in savings, and $15,200 in a Roth IRA holding a bond index fund (which should not be held at all but counts for this calculation). Total wealth: $85,022.
Nisab is $510. Your wealth exceeds nisab. Zakat calculation: $85,022 × 0.025 = $2,125.55. You pay $2,126 in Zakat. Your total stock market index fund represented 57% of your zakatable wealth and was correctly included in the calculation.
Example: International index fund Zakat
Your Vanguard Total International Stock Index Fund (VTIAX) holding: 580 shares. NAV on Zakat date: $32.10. Total value: 580 × $32.10 = $18,618. You also own 190 shares of Vanguard S&P 500 (VFIAX) at NAV $420, worth $79,800. Combined mutual fund value: $98,418.
Add cash accounts ($14,200) and gold jewelry ($3,400). Total zakatable wealth: $116,018. This exceeds nisab and was above nisab for full hawl. Zakat: $116,018 × 0.025 = $2,900.45. Your international index fund is zakatable just like domestic funds.
Actively managed equity funds are zakatable
Actively managed mutual funds have portfolio managers who actively select stocks trying to beat market indexes. Examples include Fidelity Contrafund (FCNTX), American Funds Growth Fund of America (AGTHX), or T. Rowe Price Blue Chip Growth (TRBCX). These funds charge higher fees than index funds but aim to deliver superior returns. For Zakat on mutual funds, actively managed equity funds are zakatable identically to index funds because both hold stocks representing ownership in companies.
The active versus passive management distinction is irrelevant for Zakat. What matters is the underlying assets. If the fund holds stocks, it is zakatable. Calculate Zakat on actively managed funds by valuing at current NAV on your Zakat date, exactly like index funds. The management style, expense ratio, and performance relative to benchmarks do not affect Zakat treatment. Similar principles apply to all equity holdings as explained in our Investment Zakat guide.
Shariah compliance
Bond funds, money market funds, and prohibited investments
Understanding which mutual funds are haram and how to handle them for Zakat.
Bond funds are prohibited in Islam and should be avoided
Bond mutual funds hold portfolios of bonds, which are interest bearing debt securities. When you own a bond fund, you are lending money to governments or corporations in exchange for fixed interest payments. This is riba, which is explicitly prohibited in Islam. Allah says in the Quran: "Allah has permitted trade and forbidden riba" (Quran 2:275). Bond funds include total bond market funds, corporate bond funds, government bond funds, municipal bond funds, and international bond funds from providers like Vanguard (BND, VBTLX), Fidelity (FXNAX), or others.
Muslims should not invest in bond funds at all. If you currently hold bond funds, you must sell them and redirect capital to halal investments. For Zakat purposes, the presence of haram wealth does not eliminate Zakat obligation. You still owe Zakat on haram wealth if your total wealth exceeds nisab for hawl. However, any gains from haram investments should be purified by donating them to charity, not counted as Zakat. Only donate gains to charity, keep your original principal to reinvest in halal assets.
Money market funds contain interest bearing securities
Money market mutual funds hold short term debt securities including Treasury bills, commercial paper, and certificates of deposit. These pay interest and are therefore haram. Many brokerage accounts automatically sweep uninvested cash into money market funds like Vanguard Prime Money Market (VMMXX) or Fidelity Government Money Market (SPAXX). These earn interest, which is prohibited. Instead, request your brokerage to keep uninvested cash in a settlement fund without interest, or immediately invest cash into halal equity investments. For Zakat calculation, money market fund balances are still zakatable wealth despite being haram, but you should eliminate these holdings immediately and purify any interest earned by donating it to charity separate from Zakat.
Target date funds may contain bonds and need evaluation
Target date funds (also called lifecycle funds) automatically adjust asset allocation based on target retirement year. Vanguard Target Retirement 2050 (VFIFX), Fidelity Freedom 2055 (FDEWX), or similar funds are common in 401k plans. These funds hold both stocks and bonds. As you approach target retirement date, bond allocation increases. Young investors might have 10% bonds, while investors near retirement might have 40% or 50% bonds in their target date fund.
Target date funds with significant bond allocations are problematic for Muslims because bonds are haram. If you hold target date funds in a 401k where you have limited investment options, consult Islamic scholars about your specific situation. Some scholars permit holding mixed funds in restricted retirement accounts if bond allocation is minor and you have no halal alternatives, while requiring purification of bond portion returns. Others say avoid them entirely even in 401k. For Zakat on mutual funds in target date funds, the entire fund value is zakatable if the account is accessible, but bond portion gains should be purified separately from Zakat.
All halal mutual funds included
Index funds and equity funds calculated together annually
One simple annual calculation on total mutual fund portfolio value.
Use Calculator →Valuation
How to value mutual funds correctly for Zakat calculation
Understanding NAV, cost basis, unrealized gains, and the correct valuation approach.
Use current NAV on Zakat date, not original cost basis
A critical principle for Zakat on mutual funds is that you calculate based on current market value on your Zakat date, not the original cost basis when you purchased shares. Cost basis is what you paid. Current NAV is what the shares are worth now. Zakat is on wealth you currently possess, not on historical purchase prices. If you bought mutual fund shares at $50 per share five years ago and they are now worth $120 per share, you calculate Zakat on the $120 current value, not the $50 you paid.
This applies whether you have gains or losses. If you bought at $100 and current NAV is $85, calculate Zakat on $85 current value even though you have unrealized losses. If you bought at $40 and current NAV is $130, calculate Zakat on $130 current value including all unrealized gains. The cost basis number shown on your tax forms is irrelevant for Zakat. Only current market value matters. This principle applies to all investments as explained in our Investment guide.
Example: Valuing mutual funds with significant gains
Over 10 years, you invested $60,000 total into Vanguard S&P 500 Index Fund through monthly contributions. Your average cost basis is approximately $82 per share. You now own 731.7 shares. On your Zakat date, NAV is $135 per share. Your holding is worth 731.7 × $135 = $98,779.50. Your unrealized gain is $98,779.50 - $60,000 = $38,779.50. For Zakat on mutual funds, you calculate on the full $98,779.50 current value, not the $60,000 cost basis. The unrealized gain is part of your current wealth and is fully zakatable. You do not deduct the cost basis or exclude the gain portion.
Check NAV on your specific Zakat date
Mutual fund NAV changes daily based on market prices of underlying holdings. For accurate Zakat on mutual funds, you must check NAV on your actual Zakat date, not days or weeks before or after. If your Zakat date is 1st Ramadan and that falls on March 15th in the Gregorian calendar, check your mutual fund NAV as of market close on March 15th. Do not use NAV from March 1st or March 30th. The specific date matters because NAV fluctuates.
Most brokerage platforms show current NAV when you log in. Vanguard, Fidelity, Schwab, and others display NAV updated daily after market close. If your Zakat date falls on a weekend or market holiday when NAV is not calculated, use the most recent available NAV from the last trading day. For example, if your Zakat date is Saturday March 16th, use Friday March 15th closing NAV since markets are closed on weekends. Learn more about timing in our When to Pay Zakat guide.
Distributions
Capital gain distributions, dividend distributions, and automatic reinvestment
How mutual fund distributions affect Zakat calculation.
Mutual fund distributions do not trigger immediate Zakat
Mutual funds make distributions to shareholders periodically. Capital gain distributions occur when the fund sells stocks at a profit and passes gains to shareholders. Dividend distributions occur when stocks held by the fund pay dividends and the fund passes dividend income to shareholders. These distributions typically happen quarterly or annually. For Zakat on mutual funds, these distributions do not create immediate Zakat obligations at the moment they occur. They are income entering your wealth, not separate Zakat events.
Distributions are handled in one of two ways. If you elect cash distributions, the distribution amount is paid to your brokerage settlement fund as cash. This cash merges with your other cash holdings and is included in Zakat calculation on your annual Zakat date through your cash balance. If you elect automatic reinvestment, the distribution is used to purchase additional mutual fund shares. This increases your total share count, which increases your total fund value, and is included in Zakat calculation through your increased shareholding on your Zakat date. Either way, distributions are accounted for annually, not immediately upon receipt.
Example: Capital gain distribution with reinvestment
December 15th: Your actively managed mutual fund declares a capital gain distribution of $4.20 per share. You own 500 shares. Distribution amount: $4.20 × 500 = $2,100. You have automatic reinvestment enabled. The $2,100 is used to purchase additional shares at NAV of $87.50. Additional shares acquired: $2,100 ÷ $87.50 = 24 shares. Your new total: 524 shares. On your Zakat date in Ramadan, you own 524 shares at current NAV $91.30. Total value: 524 × $91.30 = $47,841.20. The capital gain distribution is reflected in your increased share count. You do not track the $2,100 distribution separately for Zakat purposes.
Monthly contributions through automatic investment plans
Many investors contribute to mutual funds monthly through automatic investment plans that pull money from checking accounts. You might invest $500 monthly into a Vanguard Target Retirement fund or $1,000 monthly into an S&P 500 index fund. Each month, your contribution purchases additional shares at the current NAV. Your share count grows continuously throughout the year. For Zakat on mutual funds, monthly contributions do not trigger monthly Zakat obligations.
Calculate Zakat once annually on your Zakat date by checking total shares owned at that moment and valuing at current NAV. If you contributed monthly for the full year, your final share count reflects all twelve contributions. You do not track which shares came from which month's contribution. On your Zakat date, you simply count total shares, multiply by NAV, and include the total value in zakatable wealth. The monthly contribution pattern is irrelevant. Only the final accumulated value on your Zakat date matters.
Real situations
Detailed examples of Zakat on mutual funds calculation
Step by step walkthroughs showing exactly how Muslim investors calculate Zakat on mutual fund holdings.
Index fund investor with three fund portfolio
Background: Fatima follows the three fund portfolio strategy with Vanguard index funds. She owns Vanguard Total Stock Market (VTSAX), Vanguard Total International (VTIAX), and previously bought Vanguard Total Bond (VBTLX) before learning bonds are haram. Her Zakat date is 1st Ramadan.
Holdings on Zakat date: VTSAX: 285 shares at NAV $119.80 = $34,143. VTIAX: 410 shares at NAV $31.65 = $12,976.50. VBTLX: 125 shares at NAV $10.42 = $1,302.50 (she will sell this immediately after Zakat calculation). Total mutual fund value: $48,422. She also has $8,900 in checking, $15,300 in high yield savings, and $4,200 gold jewelry.
Zakat calculation: Total zakatable wealth: $48,422 + $8,900 + $15,300 + $4,200 = $76,822. Nisab is $495. Her wealth exceeds nisab and was above nisab continuously for full lunar year. Zakat due: $76,822 × 0.025 = $1,920.55. She pays $1,921.
Key insight about Zakat on mutual funds: Fatima valued each mutual fund at current NAV on her Zakat date, not at cost basis. Her stock index funds (VTSAX and VTIAX) totaling $47,119.50 represented 61% of her zakatable wealth. The bond fund is included in Zakat calculation despite being haram, but after paying Zakat she immediately sells VBTLX and purifies any gains from it by donating to charity separate from Zakat.
Young professional with monthly S&P 500 contributions
Background: Ahmad is 28 and contributes $750 monthly to Fidelity 500 Index Fund (FXAIX) through automatic investment. He started investing 18 months ago. He wants to understand when Zakat becomes due on his mutual fund accumulation.
Investment history: Total contributed over 18 months: $750 × 18 = $13,500. He bought shares at varying NAVs throughout the period, averaging around $155 per share. Current holding: approximately 87 shares. Current NAV on his Zakat date: $168.50. Total value: 87 × $168.50 = $14,659.50. His unrealized gain is $14,659.50 - $13,500 = $1,159.50.
Other wealth: Checking account: $6,400. Savings account: $9,800. Emergency fund: $4,200. Total wealth: $14,659.50 + $6,400 + $9,800 + $4,200 = $35,059.50.
Nisab check: Nisab is $510. His $35,059.50 far exceeds it. He crossed nisab 14 months ago when his total wealth first exceeded it. He has now been above nisab for more than one lunar year. Zakat is due for first time.
Zakat calculation: $35,059.50 × 0.025 = $876.49. He pays $876.50.
Key insight about Zakat on mutual funds: Ahmad contributed monthly but never paid Zakat monthly. His Zakat obligation began when total wealth crossed nisab and remained above it for one lunar year. His mutual fund holdings of $14,659.50 include all monthly contributions throughout the year valued at current NAV, not individual contribution amounts. The monthly investment strategy does not change the annual Zakat methodology.
Retiree with large mutual fund portfolio
Background: Ibrahim is 68 and retired with substantial taxable brokerage account mutual fund holdings accumulated over 30 years. He owns multiple Vanguard funds and takes quarterly distributions as cash for living expenses. His Zakat date is 15th Shaban.
Mutual fund holdings: Vanguard Wellington (VWELX): 2,840 shares at NAV $48.20 = $136,888. Vanguard Dividend Growth (VDIGX): 1,920 shares at NAV $35.85 = $68,832. Vanguard Growth Index (VIGAX): 850 shares at NAV $142.60 = $121,210. Total mutual fund value: $326,930.
Other assets: Checking (holding recent distributions): $12,800. Savings account: $28,400. Gold: $8,900. Total wealth: $377,030.
Zakat calculation: Nisab is $520. His wealth far exceeds this. Zakat: $377,030 × 0.025 = $9,425.75. He pays $9,426.
Key insight about Zakat on mutual funds: Ibrahim's substantial mutual fund portfolio of $326,930 represents 87% of his zakatable wealth. He calculates Zakat on current NAV, not the cost basis from decades of accumulated purchases. His quarterly cash distributions throughout the year are reflected in his checking account balance on Zakat date. The mutual funds remain his primary zakatable asset despite being in retirement and taking regular distributions.
401k target date fund and Zakat considerations
Background: Aisha is 35 with $78,000 in her employer 401k, all invested in Vanguard Target Retirement 2050 Fund. She cannot access this money without penalty until age 59.5. She also has taxable brokerage account and cash savings. She needs to understand Zakat on her retirement mutual funds.
401k holding: Vanguard Target Retirement 2050: approximately 1,560 shares at NAV $50.00 = $78,000. This fund holds approximately 90% stocks and 10% bonds given her age and target date. She cannot access this account without penalty.
Accessible wealth: Taxable brokerage (VTSAX): $24,200. Checking: $8,100. Savings: $16,800. Total accessible wealth: $49,100.
Scholarly position on 401k: Most Islamic scholars say inaccessible retirement accounts like 401k are not currently zakatable because you cannot control or use the funds. She would exclude the $78,000 from Zakat calculation until she can access it at retirement age. Minority opinion says include it because it legally belongs to you.
Zakat calculation (majority position): Zakatable wealth: $49,100 (excluding 401k). Nisab: $505. Zakat: $49,100 × 0.025 = $1,227.50.
Key insight about Zakat on mutual funds: Target date funds in inaccessible 401k accounts are treated differently than taxable mutual fund holdings according to most scholars. Aisha excludes her 401k balance but includes her taxable brokerage mutual funds. When she retires and can access the 401k, those funds become zakatable. The bond portion in target date funds raises additional Shariah compliance concerns that she should address.
Ready for your calculation
Calculate Zakat on your mutual fund portfolio now
Use our comprehensive calculator to include mutual funds and all other zakatable assets.
Open Calculator →Islamic evidence
Quran and Sahih Hadith establishing Zakat principles
Authentic textual sources proving Zakat is obligatory on investment wealth including mutual funds.
Quran
Establish prayer and give Zakat
Quran 2:43
Allah commands establishment of prayer and payment of Zakat together as fundamental obligations. Zakat is required for Muslim investors with qualifying wealth from mutual funds once conditions are met.
Quran
Give Zakat from what We provided
Quran 2:110
Believers are commanded to give Zakat from provision Allah granted. Mutual fund wealth is provision, and when total wealth including funds exceeds nisab for hawl, Zakat becomes obligatory on the total.
Quran
Take from their wealth a charity
Quran 9:103
Allah instructs taking Zakat from wealth to purify it. This verse establishes Zakat is on accumulated wealth in possession, which includes mutual fund investments valued at current NAV.
Quran
Rights of the needy in wealth
Quran 51:19
In the wealth of believers is a right for those who ask and those deprived. Mutual fund wealth that reaches nisab for hawl must have Zakat paid from it to fulfill this divine right.
Hadith
Islam built on five pillars
Sahih al-Bukhari 8
Prophet Muhammad, peace be upon him, established Zakat as one of five pillars of Islam, making it mandatory for Muslims with qualifying wealth regardless of whether wealth is held as cash, individual stocks, or pooled mutual funds.
Hadith
No Zakat until wealth completes one year
Sunan Abu Dawud 1573
The Prophet (peace be upon him) clarified wealth must remain in possession for one complete year before Zakat is due. This establishes hawl requirement for mutual fund investments, proving Zakat calculation is annual, not per contribution or per distribution.
Hadith
Zakat is a right in wealth
Sahih al-Bukhari 1395
The Prophet (peace be upon him) taught that Zakat is a right Allah placed in the wealth of the rich for benefit of the poor. Mutual fund holdings are wealth subject to this right when above nisab for hawl.
Hadith
Warning about withholding Zakat
Sahih Muslim 987a
Severe consequences warned for those who possess zakatable wealth and do not pay Zakat. This emphasizes the serious obligation to calculate and pay Zakat correctly on all accumulated wealth including mutual fund investments.
Scholarly consensus on investment assets and Zakat
All four major schools of Islamic jurisprudence (Hanafi, Maliki, Shafi, Hanbali) agree that Zakat applies to trade goods and assets held for growth. Mutual funds are modern investment vehicles that hold stocks representing ownership in companies. Islamic scholars treating modern financial instruments consistently conclude that mutual fund shares are zakatable assets because they represent proportional ownership of underlying companies, have liquid market value, and are held for investment growth. The pooled structure and professional management do not eliminate Zakat obligation. There is scholarly consensus that investment assets including mutual funds are subject to Zakat when total wealth meets nisab and completes hawl. The annual accumulation method for Zakat on mutual funds is consistent with 1400 years of Islamic jurisprudence applied to contemporary investment structures.
FAQ
Frequently asked questions about Zakat on mutual funds
Direct answers to the most common questions Muslim investors have about Zakat on mutual fund holdings.
Do I pay Zakat on mutual funds I own?▾
Yes, if your total zakatable wealth including mutual fund investments exceeds nisab and has been held for one complete lunar year. Mutual funds are zakatable assets. You value them at current Net Asset Value (NAV) on your Zakat date and include that value when calculating total zakatable wealth.
How do I calculate Zakat on mutual funds?▾
On your annual Zakat date, check the current NAV of your mutual fund shares. Multiply total shares owned by current NAV per share to get total fund value. Include this value with all other zakatable assets (cash, other investments, gold). If total exceeds nisab and was above nisab for full lunar year, pay 2.5% Zakat on the complete total.
Do I pay Zakat on index funds like S&P 500 funds?▾
Yes. Index funds tracking S&P 500, total stock market, international indexes, or any equity index are zakatable investments. Value your index fund shares at current NAV on your Zakat date. Include this value in your total zakatable wealth calculation and pay 2.5% if conditions are met.
What about Zakat on bond funds or money market funds?▾
Bond funds and money market funds contain interest-based securities which are haram. You should not invest in these. If you currently hold them, sell them and redirect to halal investments. Any gains from haram investments should be purified by donating them to charity, not counted as Zakat.
Should I calculate Zakat on cost basis or current market value of mutual funds?▾
Calculate Zakat on current market value (NAV) on your Zakat date, not original cost basis. Zakat is on wealth you currently possess, not what you paid. If you bought fund shares at $50 and they're now worth $75, calculate Zakat on $75 current value per share.
Do mutual fund distributions trigger immediate Zakat?▾
No. Capital gain distributions and dividend distributions from mutual funds do not trigger immediate Zakat. These distributions either get reinvested (increasing your share count) or paid as cash (merging with your wealth). Calculate Zakat once annually on your total wealth, not per distribution.
What if I contribute to mutual funds monthly through automatic investment?▾
Monthly contributions do not trigger monthly Zakat. You receive shares monthly throughout the year, but calculate Zakat once annually. On your Zakat date, count total shares you own (from all contributions throughout the year), multiply by current NAV, and include in total zakatable wealth.
Are target date retirement funds zakatable?▾
Yes, if accessible. Target date funds (like Vanguard Target Retirement 2050) in taxable brokerage accounts are zakatable. Value at current NAV on Zakat date. However, target date funds in 401k or IRA that you cannot access are not zakatable according to most scholars until you can access them.
How do I check if my mutual fund is Shariah compliant for Zakat?▾
Before calculating Zakat, ensure your mutual fund investments are halal. Avoid bond funds, conventional money market funds, and funds holding haram stocks (alcohol, gambling, conventional banks). Use Shariah compliant funds or verify your fund's holdings against Islamic screening criteria. Zakat applies to halal wealth.
What is the correct method for Zakat on mutual funds?▾
The correct method is annual valuation. Choose one Zakat date on Islamic calendar. On that date each year, check current NAV of all mutual fund holdings. Calculate total value: shares owned × NAV per share. Add this to all other zakatable assets (cash, stocks, gold, crypto). Compare total to nisab. If above nisab for full lunar year, pay 2.5% Zakat on complete total.
Implementation
Practical tips for managing Zakat on mutual funds
Make your annual Zakat calculation simple and accurate with these strategies for mutual fund investors.
1. Choose your Islamic calendar Zakat date
Select one date on the Islamic lunar calendar for annual Zakat calculation. Many Muslims choose 1st Ramadan or 15th Shaban. Set a recurring reminder in your phone one month in advance. This gives you time to check brokerage statements, review fund holdings, verify NAV prices, and compile information on all wealth sources before your Zakat date arrives.
2. Know your exact share counts for each fund
If you contribute monthly or have dividend reinvestment enabled, your mutual fund share counts change throughout the year. On your Zakat date, log into your brokerage account and check exact current share counts for each mutual fund you own. Do not estimate or use old statements. Multiply each fund's shares by current NAV to get accurate total value.
3. Verify you are checking NAV not share price
Mutual funds use Net Asset Value, not stock market share price. NAV is calculated once per day after market close. When you check your mutual fund value on your Zakat date, verify you are using NAV per share, not intraday estimates. Most brokerage platforms clearly show NAV. For Vanguard, Fidelity, Schwab, and others, NAV updates by end of trading day.
4. Eliminate bond funds and haram holdings first
Before calculating Zakat, review your mutual fund holdings for Shariah compliance. If you hold total bond market funds, corporate bond funds, government bond funds, or money market funds, you should sell these and redirect to halal equity investments immediately. Avoid target date funds with significant bond allocations. Focus your portfolio on equity index funds and Shariah screened funds.
5. Combine mutual funds with all other assets
Your Zakat on mutual funds should be part of comprehensive Zakat calculation including not just fund holdings, but also bank account balances, individual stocks, ETFs, gold jewelry, cryptocurrency, and money in any accessible form. Combine everything for complete calculation. Our calculator guides you through all categories.
6. Pay Zakat promptly after calculation
Once you calculate your Zakat amount, pay it promptly to eligible recipients. You can pay to Islamic charities, send to family members in need overseas, or distribute directly to poor Muslims you know. The obligation is fulfilled when money reaches eligible recipients. Record the amount paid and date for your personal records and future reference.
The core principle for Zakat on mutual funds
Remember this simple truth: you hold mutual fund shares throughout the year, contributing monthly or receiving distributions, but you calculate Zakat once per year. Your mutual funds are investment wealth you own. When your annual Zakat date comes, you check total mutual fund value at current NAV for each fund, add all other zakatable assets, compare total to nisab, and calculate 2.5% if conditions are met. This is the Islamic method that has worked for 1400 years for all types of wealth and continues to work perfectly for modern investors holding mutual funds.
Ready to calculate correctly
Calculate your Zakat on mutual fund wealth
Stop worrying about individual contributions and distributions. Calculate your actual annual Zakat obligation on all accumulated wealth from mutual funds, index funds, cash accounts, plus other zakatable assets. The process takes minutes with our comprehensive calculator designed for Muslim investors.
Related guides for investors
Disclaimer: This guide provides general educational information about Zakat on mutual funds based on widely accepted Islamic scholarly opinions and jurisprudential consensus from the four major schools of Islamic law. Individual circumstances vary significantly based on fund types (index vs active), asset classes held within funds (equity vs bonds), retirement account restrictions (401k, IRA, Roth), employer match considerations, contribution timing, distribution elections, tax treatment, Shariah screening requirements, international fund holdings, currency considerations, and personal financial situations. For questions about complex fund structures (target date funds with bonds, sector funds, leveraged funds), inaccessible retirement accounts, employer stock funds, real estate funds (REITs), commodity funds, mixed asset allocation, or edge cases involving fund mergers, liquidations, and tax loss harvesting with mutual funds, consult qualified Islamic scholars who understand both Islamic commercial law and modern mutual fund structures. This guide is designed to help the majority of Muslim investors understand and fulfill their Zakat obligations correctly using established Islamic jurisprudence that has governed investment wealth for over 1400 years, now applied to contemporary pooled investment vehicles.
About this Content
Written by the Zakat Finance editorial team. All content is based on authentic Islamic scholarship and is reviewed regularly to ensure accuracy. The content aims to provide guidance on Zakat calculation and does not replace advice from a qualified Islamic scholar.
Last updated: February 2026
Method note: We present common scholarly approaches to Zakat calculation, encouraging consultation with trusted scholars for personal cases.