What is a Mutual Fund
A mutual fund is a general term for funds that allow you to pool your money with that of other investors and are managed by a team of investment professionals. The term may vary across countries, but mutual funds may also be referred to as collective investment schemes, unit trusts or simply as funds. The pooling of your money generally creates greater buying power, enabling you to invest in a wider range of investments than would be possible for most individual investors.
Each investor in a fund owns units (or shares) which represent a part of a fund’s portfolio holdings. Mutual funds can be categorized by the type of assets they invest in (such as Shariah complaint shares, Shariah complaint Sukuk, cash placed with Islamic financial institutions or other Shariah complaint securities). You can refer to the mutual fund’s prospectus and fact sheets to get a better understanding of their respective investment objectives and policy (for example, type and mix of investments) and past performance.
Open-end Funds
They can issue and redeem units at specified times to meet subscription or redemption requests from investors. Generally, buying and selling of units take place directly between investors and the fund or its agents. The price per unit of an open-end fund varies in proportion to the fund’s net asset value, reflecting its performance.
Fees of Islamic Mutual Funds
Mutual funds may charge various fees, and it is best to refer to the fund’s prospectus or fact sheets to understand these charges.
- Management fee
- Front End Load
- Back End Load
Types of Islamic Mutual funds
Islamic mutual funds are Shariah-compliant, adhering to Islamic principles by avoiding interest-based transactions. These can broadly be divided into four main categories:
- Islamic Money Market Funds
These funds seek to maintain a stable net asset value by investing in short-term, high-grade Shariah-compliant securities available in the money market. They are generally the safest, most stable securities available, including Shariah-compliant certificates of deposit and Shariah-compliant commercial paper. - Islamic Equity (Stock) Funds
As the name suggests, Equity Funds consist mainly of Shariah-compliant stock investments and are the most common type of mutual funds. Often, Shariah-compliant equity funds focus on particular investment strategies, such as growth, value, large caps and small caps, or themes such as property, energy, and healthcare. The funds can be invested globally, regionally, or in single countries. - Islamic Sukuk (Fixed) Funds
These funds invest mainly in Shariah-compliant government Sukuk, Shariah-compliant corporate Sukuk, or Shariah-compliant mortgage-backed securities. The returns of a Shariah-compliant Sukuk fund may vary depending on the type of Sukuk. Typically, Sukuk funds investing in short-term Sukuk are less volatile. Sukuk funds investing in Shariah-compliant corporate Sukuk generally aim to obtain higher yields but carry greater risk. - Islamic Hybrid Funds
These funds invest in a mix of Shariah-compliant stocks and Sukuk and may also hold Shariah-compliant money market instruments, which can vary proportionally over time or remain fixed. They may be further sub-divided into balanced funds, asset allocation funds, and lifecycle funds.
