Mutual funds, in general, are a type of investment vehicle made up of a pool of funds collected from many investors to invest in securities such as stocks, bonds, money market instruments, and other assets. These funds are managed by professional money managers who allocate the assets to achieve the fund’s investment objective, such as capital appreciation, income generation, or a combination of both. Investors in mutual funds own shares of the fund, representing a portion of the fund’s holdings. Mutual funds offer diversification, professional management, and convenient access to a wide range of investment options for individual investors. Now let’s come to our main topic.
Islamic mutual funds, on the other hand, are investment funds that comply with the principles of Islamic finance, also known as Shariah principles. These principles prohibit investments in certain industries such as alcohol, gambling, tobacco, pornography, and pork products including any investment in illicit products. In addition, charging or paying interest (riba) is strictly prohibited. It also adheres to the profit and loss sharing principles. Briefly, the difference between traditional mutual fund investments and Islamic mutual fund investments is that the former does not adhere to shariah-compliant principles whilst the latter strictly adheres to not only shariah-compliant principles but also to the profit and loss sharing principles.
Islamic mutual funds are also managed by experienced professionals as in traditional mutual funds. However, the managers of Islamic mutual funds ensure that the fund’s investments comply with Shariah principles. They offer both Muslims and non-Muslims the opportunity to invest in a diversified portfolio of assets. These funds typically invest in a variety of asset classes including stocks, bonds, real estate, and commodities, providing investors with the potential for financial growth while adhering to Islamic principles.
Some examples of thriving Islamic mutual funds organisations around the world currently include Amana Mutual Funds Trust, headquartered in Washington, USA. Wahed Invest Halal Portfolio is headquartered in UAE, SaturnaSdnBhd in Malaysia, HSBC Islamic Global Equity Fund, Franklin Shariah Technology Fund based in the Middle East, Templeton Shariah Global Equity Fund, etc. These are just a few examples of Islamic mutual funds available in the market. Investors need to conduct thorough research and consult with financial professionals to find the best Islamic mutual funds that suit their individual investment goals and preferences.
Islamic mutual funds can contribute to the growth of an economy in several ways:
Firstly, Islamic mutual funds adhere to Shariah principles, which prohibit investments in businesses involved in activities deemed unethical or harmful to society. By promoting ethical and responsible investing, Islamic mutual funds help support businesses that operate in a socially responsible manner and contribute positively to the economy.
Secondly, Islamic mutual funds invest in Shariah-compliant assets, which often include sectors such as healthcare, education, technology, and infrastructure. By channelling funds into these sectors, Islamic investments help allocate capital efficiently to industries that have the potential to drive economic growth and development.
Thirdly, Islamic finance principles emphasize risk-sharing, transparency, and fairness in financial transactions. Islamic mutual funds provide investors with access to diversified investment opportunities that comply with Shariah guidelines, thereby promoting financial inclusion and expanding the pool of capital available for economic activities.
Moreover, Islamic financial principles discourage excessive speculation and the use of interest-bearing instruments, which can help reduce systemic risks in the financial system. Islamic mutual funds, by investing in a diversified portfolio of assets that comply with Shariah guidelines, can contribute to greater financial stability and resilience in the economy.
Last but not least, Islamic mutual funds are increasingly gaining popularity among Muslim and non-Muslim investors seeking ethical and socially responsible investment options. By offering Shariah-compliant investment opportunities, Islamic mutual funds can attract foreign investment and contribute to the growth of the economy.
In a nutshell, Islamic mutual funds play a significant role in promoting ethical investing, efficient capital allocation, financial inclusion, stability, and resilience in the economy, which can contribute to long-term economic growth and prosperity. And Allah knows best! “Praise be to Allah in whose favour good deeds are accomplished” (ibn Majah 3803).
YAHAYA ILIASU MUSTAPHA
The writer is an Islamic Banking and Finance patron and advocate in Ghana and beyond.
Email: yahaya0246873726@gmail.com
https://www.facebook.om/Yahaya.iliasu.94
0506218343 / 0246873726