Examining the fundamentals of Islamic investment funds

By: Hong Kok Cheong

With Sharia funds expected to grow significantly over the next twelve months, investment managers must understand the rules of Sharia investments to ensure success. In this first of a 4-part blog series that examines the fundamentals of investing under Sharia rules, we take a close look at Islamic investment funds.

What is an Islamic investment fund?

An Islamic investment fund is a joint pool where investors contribute their surplus money for the purpose of its investment to earn halal profits. Islamic investment funds conform strictly to the precepts of Islamic Sharia.

Islamic investment fund subscribers receive a document (called a certificate, unit, or share) that certifies their subscription and entitles them to the pro-rated profits accrued to the fund.

These documents are subject to two conditions:

  1. Instead of a fixed return tied up with their face value, they must carry a prorated profit actually earned by the fund. Therefore, neither the principal nor a rate of profit (tied up with the principal) can be guaranteed. The subscribers must enter into the fund with a clear understanding that if the fund earns profits, the return on their subscription will increase to the proportion of the profit; if the fund suffers loss, they share the loss, unless it is caused by negligence or mismanagement, in which case the management compensates it.
  2. The pooled amounts must be invested in a business acceptable to Sharia; both the channels of investment and the terms agreed with them must conform to the Islamic principles.

Islamic investment fund subscribers must have a deep knowledge of Sharia rules and how they apply to their investments. Read the next part of this blog series, “In some cases, equity shares admissible under Sharia rules” to find out how present-day Sharia scholars interpret the Sharia rules of investing.

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