In principle, the fund manager of a mutual fund functions as a paid agent acting on behalf of the investors.[1] With respect to dividend payments and capital gains distributions, mutual funds ordinarily provide investors with a choice: the mutual fund can transfer the amount to the investor, or the investor can elect to have the dividends or distributions reinvested in the mutual fund to purchase additional shares.[2]

Once a company share owned by the mutual fund declares and pays a dividend, that amount enters the ownership of the investor and is considered to be their property, but is received by the fund manager on the investor's behalf, who then deals with it as instructed by the investor (i.e., either transferring it to the investor or reinvesting it). Accordingly, for all practical purposes, the investor has received the dividend income even where automatic dividend reinvestment has been elected.[3] Therefore, the proportionate amount of impermissible income attributable to that dividend remains subject to purification.[4]

Finally, the subsequent reinvestment of dividends containing a proportion of impermissible income does not affect the permissibility of any future gains arising from those reinvested amounts.

And Allah knows best.

Mufti Muhammad Bilal Khizar
Graduate, Darul Iftaa Chicago

Reviewed and approved

Mufti Abrar Mirza
Head Mufti, Darul Iftaa Chicago