ISLAMIC CAPITAL MARKET

FIV20803

FEBRUARY 2023

ASSIGNMENT :
ISLAMIC MUTUAL FUND

PREPARED BY:

NAME MATRIC NO
MUHAMMAD LUQMAN HAKIM BIN BADERILLAH 012020021319
MUHAMMAD AFIQ BIN ABDUL SHUKUR 012020091522
MUHAMMAD BINTANG FACHRIZI 012022090918

PREPARED FOR:

MADAM NOR AMILIA IZZATI BINTI MUHAMAD

SUBMISSION DATE:

18th MAY 2023

Table of Content
NAME NO
1.0 Introduction 1

2.0 Element of Islamic Mutual Fund 4

3.0 Illustration of Islamic Mutual Fund 7

4.0 Application 8

5.0 Conclusion 9

6.0 References 10
1.0 INTRODUCTION

Islamic mutual funds, also known as Sharia-compliant funds, have gained significant
popularity in recent years. These investment vehicles adhere to Islamic principles and are
designed to provide Muslims with investment opportunities that align with their religious
beliefs. Islamic mutual funds follow strict guidelines outlined in Islamic law, known as Sharia,
which prohibits investments in certain sectors such as alcohol, gambling, tobacco, and
financial products that involve interest (riba).

This introductory section aims to provide a comprehensive overview of Islamic mutual funds,
covering their definition, general knowledge, and historical performance. Additionally, it will
delve into the details of the performance of Islamic mutual funds, highlighting their key
characteristics and benefits.

1.1 Definition of Islamic mutual funds

Islamic mutual funds are investment vehicles that pool money from multiple investors to invest
in a diversified portfolio of assets, all of which comply with Sharia principles. These funds are
managed by professional fund managers who carefully select investments that adhere to the
ethical and religious guidelines set by Islamic law.

The underlying principles of Islamic mutual funds revolve around the concepts of ethics, social
responsibility, and risk-sharing. Sharia-compliant investments must be based on tangible
assets, businesses, or activities that generate Halal (permissible) income. The primary
objective of Islamic mutual funds is to provide investors with financial returns while adhering
to the principles of Islamic finance.

Islamic mutual funds offer investors an opportunity to diversify their portfolios across various
asset classes, including equities, sukuk (Islamic bonds), real estate, commodities, and Islamic
money market instruments. The funds are structured to ensure compliance with Sharia
principles, and a Sharia advisory board, comprising Islamic scholars, is often appointed to
provide guidance and oversight.

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1.2 History of Islamic Mutual Fund

The development of these funds can be traced back to the mid-20th century when the concept
of Islamic finance started gaining prominence. Here is a detailed history of Islamic mutual
funds:

The idea of Islamic mutual funds emerged in the 1970s as a response to the growing demand
for investment options that aligned with Islamic principles. Islamic scholars and financial
experts recognized the need to provide Muslims with investment opportunities that were in
compliance with Sharia law.

The Amana Funds, established in the United States in 1984, were among the pioneers of
Islamic mutual funds. The Amana Funds were founded by two American Muslims who
presented the idea of a mutual fund for Muslim investors. The funds were designed to invest
in a manner consistent with Islamic principles, avoiding investments in companies involved in
prohibited activities such as alcohol, gambling, and pork-related products.

In the 1990s, the popularity of Islamic mutual funds grew as Muslims across the world sought
investment options that aligned with their religious beliefs. Various countries, including
Malaysia, Bahrain, and Saudi Arabia, witnessed the establishment of Islamic mutual funds,
catering to the needs of local and international investors.

To facilitate the growth of Islamic mutual funds, the development of Islamic indexes became
crucial. In 1999, the Dow Jones Islamic Market Index (DJIMI) was launched as the first
benchmark for Islamic investments. The DJIMI screens and removes companies involved in
non-compliant activities, providing a framework for Sharia-compliant investing.

As the Islamic finance industry expanded, regulatory bodies were established to ensure
compliance with Sharia principles. The Accounting and Auditing Organization for Islamic
Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB) played
significant roles in setting standards and guidelines for Islamic mutual funds. These bodies
provided frameworks for Sharia compliance, accounting standards, and risk management
practices.

As the industry matured, Islamic mutual funds began offering a wider range of investment
options, including equities, fixed income securities, real estate, and commodities. Fund
managers developed innovative products to cater to the diverse needs of investors while
adhering to Sharia principles. The introduction of exchange-traded funds (ETFs) and real
estate investment trusts (REITs) in Islamic finance further expanded the investment
landscape.

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1.3 Performance of Islamic Mutual Fund

Islamic mutual funds gained recognition beyond Muslim-majority countries. Financial centers
such as London, Luxembourg, and Hong Kong started offering Sharia-compliant investment
products to tap into the growing demand from both Muslim and non-Muslim investors.
Regulatory bodies in these jurisdictions developed frameworks and guidelines to facilitate the
establishment and operation of Islamic mutual funds.

The growth of Islamic mutual funds continues, driven by increasing awareness, demand, and
regulatory support. Financial institutions and fund managers are constantly working to develop
innovative products, enhance risk management practices, and expand the range of investment
options available to investors. Collaboration between Islamic scholars, industry experts, and
regulatory bodies ensures the continued development and sustainability of Islamic mutual
funds.

Over the past few decades, Islamic mutual funds have experienced remarkable growth and
demonstrated competitive performance in comparison to conventional funds. This growth can
be attributed to the increasing demand for Sharia-compliant investment options among Muslim
investors worldwide.

One key factor contributing to the growth of Islamic mutual funds is the significant expansion
of the Islamic finance industry. Many countries with predominantly Muslim populations have
established regulatory frameworks that promote the development of Islamic financial markets.
This has resulted in the creation of a supportive ecosystem for Islamic mutual funds, leading
to increased investor confidence and participation.

The performance of Islamic mutual funds has generally been positive, with numerous studies
indicating that they have achieved competitive returns compared to conventional funds.
However, it is important to note that the performance of Islamic mutual funds can vary based
on factors such as market conditions, asset allocation strategies, and the expertise of fund
managers.

The performance of Islamic mutual funds is influenced by various factors unique to Sharia-
compliant investing. For example, the exclusion of interest-based investments means that
Islamic mutual funds are less exposed to interest rate risk, which can be advantageous in
certain economic environments. Additionally, the emphasis on ethical investments and risk-
sharing principles may lead to a more stable and sustainable investment approach.

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It is worth mentioning that like any investment, Islamic mutual funds carry certain risks. Market
fluctuations, economic conditions, and geopolitical factors can impact their performance.
However, diligent fund management, robust research, and adherence to Sharia principles help
mitigate these risks and enhance the overall stability of Islamic mutual funds.

2.0 ELEMENT OF ISLAMIC MUTUAN FUND

A mutual fund is comprised of several elements, one of which is product planning. Product
planning, when applied to the subject of mutual funds, refers to the procedure of developing
and designing new mutual fund products or making revisions to current funds in order to suit
the ever-changing demands of investors. The Research and Analysis of the Market as a Whole
Market research is carried out by organizations that manage mutual funds in order to ascertain
the requirements of investors, their preferences, and the trends in the market. This involves
research into the demographics of investors, their appetite for risk, their investing goals, and
the landscape of the competition. An investigation of the market can assist determine where
there are voids in the market as well as chances for the introduction of new fund offerings or
the modification of existing fund structures. The mutual fund business determines its
investment goals over the new product or change on the basis of the market research that it
conducted. An increase in the value of the investment, the production of income, the
maintenance of the value of the investment, or some combination of these could be the
investment goals. The objectives must be tailored to the preferences of the target market as
well as the investors. The product planning component consists of the product line that will be
offered, including the quality, design, diversity of service, and other related aspects.

Next, the mutual fund sector relies heavily on branding to set itself apart from competitors,
gain investor confidence, and establish a distinct identity in a crowded marketplace. The
establishment of a powerful brand identity is absolutely necessary for mutual funds. This
includes coming up with a name for the brand, as well as a logo, tagline, and other visual
components that are meant to convey the fund's goals, values, and intended audience. The
identity of the brand should exude a sense of professionalism as well as reliability and
trustworthiness. The investors in the mutual fund should be able to understand the distinctive
value proposition communicated by the brand. In this step, you will need to articulate the
benefits of the fund, as well as its investment philosophy and competitive advantages. A
compelling value proposition explains to potential investors the advantages of an exact mutual
fund among those offered by other companies in the same industry.

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The phrase "pricing policy" is used to describe the method used by mutual fund organizations
to establish the charges made to shareholders. The most significant portion of total mutual
fund expenses is comprised of management fees. The fund business levies these fees in order
to cover the costs that are connected with operating the fund. These costs include research,
management of the fund's portfolio, administrative charges, and operational expenses. The
expense ratio refers to the percentage of the fund's total assets that are used to determine the
management fees. These costs are normally computed as a share of the fund's total assets
under management. Depending on the investment approach, the fund's asset class, and the
overall size of the fund, various funds may have varying fee structures. Companies that
manage mutual funds are strongly encouraged to disclose in an open and understandable
manner all of the costs and fees that are connected with making investments in the fund. This
includes giving extensive information from the fund's prospectus, yearly reports, and any other
documents that pertain to the fund. Investors are able to make more educated judgments and
have a better understanding of the costs that are associated with participating in the fund when
there is transparency.

On the other hand, the term "distribution policy" is used in the industry of mutual funds to refer
to the manner in which mutual funds share the returns on their investments with investors.
Investors in mutual funds that have invested in securities that generate income, such as bonds
or stocks, may be eligible to receive dividend payments from the funds. The revenue
generated from the fund's fundamental investment, which might include interest or dividend
earnings received from the securities in the portfolio, is often where dividends come from and
how they are distributed to shareholders. Investors have the potential to receive a consistent
flow of income in the form of dividends, which may be paid out on a periodic basis for example
monthly, quarterly, or annually. This channel may be utilized for the purpose of selling the items
either directly to the clients or via intermediaries such as agents, brokers, and the like.

Promotion in the mutual fund sector entails marketing and communication initiatives that are
directed toward the goals of increasing awareness, earning interest, and drawing clients to a
particular mutual fund. Companies that manage mutual funds often run advertising efforts in
an effort to attract a larger customer base. These can include advertisements printed in
financial periodicals, internet banner advertisements, commercials for television or radio
spots, outdoor advertising, and advertising on billboards and other outdoor locations. In most
cases, the commercials focus on the most important aspects of the fund, including its
investment goals, historical background, and competitive advantages. In order to
communicate with prospective investors, organizations that manage mutual funds produce
content that is both informational and instructional. Publishing blog posts, articles, and market
analyses that contain helpful information on investing, and financial planning, including the

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advantages of investing in mutual funds is one example of what this entails. Building credibility,
establishing thought leadership, and attracting investors who are looking for important
information are all accomplished with the assistance of content marketing.

Last but not least, the term "servicing" is used in the industry of mutual funds to refer to the
operations and assistance that are offered to clients and investors when they made
investments with a mutual fund that they have purchased. It comprises a variety of services
with the goals of ensuring that operations run smoothly, catering to the requirements of
investors, and preserving solid connections. Investors can make use of the account
management services offered by mutual fund companies, which include the opening and
maintenance of investor accounts. This includes managing account activities (which include
purchases, redemptions, and exchanges), handling documentation linked to the account, and
updating investor information as required. In addition, businesses that manage mutual funds
produce periodic statements and reports for investors, which detail the success of their
investments, the holdings in their accounts, the transactions they've made, and any
information that is relevant to taxes. Investors can better monitor their holdings, assess their
portfolios, and conform to regulatory requirements with the assistance of these reports. It is
possible to receive the reports in either paper or digital form, depending on your preference.

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3.0 ILLUSTRATION OF ISLAMIC MUTUAL FUND

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4.0 APPLICATION

The structure of mutual fund, have 2 parties included in it. Which is, investor and financial
manager, each of them has their own task based on their role. If one of them failed to fulfill
their task, then most likely a mutual fund contract wouldn’t happened or may be making losses,
rather than making profit. The task of each party including:

4.1 Investor

As an investor, they will need to fill application in order to invest in mutual fund. They will also
need to provide the fund to the financial manager, in order to keep increasing their investment.
Although, investor can either get profit or loss, depend on the performance of the market and
the decision made by the financial manager.

4.2 Financial Manager

On the other hand, as for financial manager, they have the most important job in the mutual
fund investment. Its none other because of their role as the manager of their investor, they are
encouraged to generate profit for the investor. In order to make it more efficient, they will make
investments in several industries such as: battery, steel, etc. This also can help to reduce the
risk of investing in one type of sector, as the stock market can go up and down. It means, if
one industry doesn’t perform well, the other industry can help to reduce the loss, this strategy
applies for both stock and sukuk market. Although, it cannot guarantee that financial manager
will always making profit, if the market not performing well or inflation occurred, its possible
that they will face a loss.

The next thing they do is, monitoring the market. After financial manager make an investment,
they will need to monitor the market, this will help them to decide what will they do with the
investment. For instance, if a stock didn’t perform well for a period of time, they can decide
whether to keep investing in that industry or sell the stocks and invest in different
industry/sector. It will also help to reduce the possibility of making a loss, and making them
gaining more profit.

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5.0 CONCLUSION

A mutual fund can be broken down into its component parts, which are its investment
portfolios, management group, fund purposes, risks profile, and fees. It is essential to have a
solid understanding of these components before attempting to evaluate the potential of the
fund, examine the investment strategy of the fund, or estimate the potential returns or risks
involved. The total performance of a mutual fund, as well as its features, are influenced by
each component individually. Investors are able to make more educated judgments regarding
investing in an exact mutual fund according to their investment objectives, level of comfort with
risk, and personal preferences when they conduct an element analysis.

The formation of a mutual fund requires the components to be assembled into a whole in order
to function as an all-encompassing investment vehicle. The construct is a representation of
the mutual fund's one-of-a-kind investment strategy, allocation of assets strategy, and
investment philosophy. Investors are able to classify mutual funds according to their investing
strategies, goals, and areas of focus on asset classes with the assistance of the construct.
Investors are able to choose mutual funds that are in line with their investment tastes and
goals if they examine the construct.

Investors are better able to evaluate the dependability and long-term viability of the mutual
fund as the businesses that are engaged when they have a solid understanding of the
structure. The structure lays out the tasks and responsibilities that are assigned to the various
entities that are responsible for the operation and management of the mutual fund. Investors
are better able to identify potential risks, evaluate the compliance with regulatory requirements
of the fund, and come to an informed conclusion about whether or not to invest in a mutual
fund when they conduct a structural evaluation.

In conclusion, investors are able to acquire a thorough understanding of a mutual fund's

investment plan, risk characteristics, and organizational framework by evaluating the aspects,
models, and structures that make up a mutual fund. This comprehension makes it easier for
investors to make educated decisions, assists investors in aligning their investment objectives
with appropriate mutual funds, and allows investors to evaluate the dependability and
sustainability of the fund they are considering investing in. Investors can make better
investment selections with the mutual fund business by applying this information and putting
it into practice.

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6.0 REFERENCES

● https://www.slideshare.net/mzuhair16/mutual-fund-66176625
● https://sci-hub.se/https://onlinelibrary.wiley.com/doi/epdf/10.1111/jofi.12263
● Habib Hasnaouia and Ibrahim Fatnassi (2021, March 2), Measuring the selectivity and
market timing performance of Islamic mutual funds in the KSA.
● A Brief History To Modern Islamic Finance by MCCA Islamic Finance and Investment.
● https://www.youtube.com/watch?v=V-pQPCnfz_0
● https://www.investopedia.com/terms/m/mutualfund.asp

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