Islamic Mutual Funds: What You Should Know About Them?

Islamic Mutual Funds are quite an interesting topic for Muslim investors. In this article, we will cover this topic briefly!

Understanding The Mutual Funds

A mutual fund is a form of financial vehicle that invests in securities such as stocks, bonds, money market instruments, and other assets by pooling money from many investors. Furthermore, professional money managers manage mutual funds. They distribute assets and attempt to generate capital gains or income for the investors’ fund. The portfolio of a mutual fund is built and managed to meet the investment objectives indicated in the prospectus. In addition, annual fees (known as cost ratios) or commissions are charged by mutual funds. It can affect their overall results.

Mutual funds provide access to professionally managed portfolios of shares, bonds, and other securities to small and individual investors. As a result, each stakeholder shares in the fund’s gains and losses proportionally. Furthermore, mutual funds allow for asset class diversification without requiring large investments. Investors in mutual funds also benefit from competent management and are free from daily concerns about the underlying investment.

Are they Halal?

Many equity funds are not halal. Fortunately, there are mutual funds available for Muslim investors. Therefore you can invest in them without worrying if they are halal.

A sharia-compliant fund is one that complies with all of Shariah law’s requirements as well as the principles of Islamic finance. The equities they hold determine whether or not they are halal. Obviously, those who created the Islamic fund would have done the sharia screening for you. Halal investment, mutual funds are excellent ways to make investments.

Islamic Mutual Funds

Islamic mutual funds are investments where the investors invest in several investment portfolios in which the investment manager acts as an intermediary. This investment is suitable for those who do not have enough time or knowledge to analyze the portfolio to purchase. The investor can benefit from the number of units he subscribes in Islamic mutual funds.

The unitholders’ relationship is similar to musharakah. The fund manager is usually acting as a mudarib or wakil. The fund manager’s role is usually determined by the type of compensation that is suited for the investment and the investor’s objectives. For example, investors would prefer to use mudarabah for higher-risk investments such as private equity and real estate.

The structure of Islamic equity products must be in accordance with Shariah, which means that the product’s features must adhere to the rules of the underlying contracts. This means that the fund manager must not only invest the funds in halal businesses but also structure them in accordance with Islamic principles. Furthermore, the amount of money invested or the rate of return can not be guaranteed.

Musharakah and Mudarabah

Two or more partners contribute funds to a project in a musharakah (equity partnership) transaction, though not always in equal amounts. A partner with a higher investment has proportionally more power over the decisions made and would get a larger percentage of any potential losses, again on a proportional basis, in this shared ownership model.

A musharakah contract must identify each partner’s profit as a predetermined percentage of whatever the total profit turns out to be to make the parameters of the agreement obvious from the start. Profit, on the other hand, isn’t always proportional to the amount spent, as is the case with loss. Musharakah contracts can be either permanent or diminishing, also declining balance musharakah, in which one partner buys out the other with regularly pre-agreed investments in the partnership. In other words, in musharakah, two or more partners supply the capital to a joint venture, based on simple partnerships; it is the basis for equity investing.

In a mudarabah transaction, one or more partners supply the capital, and the other provides expertise and management to complete a joint venture. If you do not predetermine the profit, you need to divide it using a ratio. All possible financial losses and risks are the responsibility of the capital provider. The managing partner risks are losing the time and effort spent on the project if it does not turn a profit. A mudarabah contract must specify how you share the potential profits. To simplify, mudarabah is an investment of a group of shareholders where the professional fund manager runs it.

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