Fundamentals of Islamic Money and Capital Markets

Chapter 7

Islamic Mutual Funds

Learning outcomes

At the end of this chapter, you should be able to:

1 Explain the concept of mutual funds and its features.

2 Describe Shariah stock screening and purification of income.

3 Understand the role of Shariah advisors in mutual funds.

4 Calculate net asset value (NAV) in Islamic mutual funds.

5 Learn how to start investing in Islamic mutual funds.

6 Learn the organisation of Islamic mutual funds.

7 Understand the examples of Islamic mutual funds.

Introduction

In a basic economics course, we learn that there are both indirect financing and direct financing methods. The former is usually in the form of institutions such as banks, with the banks receiving funds from parties that have excess funds and giving them to other parties that need money. In this case, banks act as financial intermediaries. Meanwhile, direct financing means the investors (parties that have money) make their funds available directly to the other parties that are in need of money, without any institutions to connect those two parties, and the transactions take place in the capital market.

Within the capital market, there are many methods that investors can use. They may select stocks that suit their preferences (i.e., risk and return). In this case they have to contact brokers in the brokerage firm to do what the investors want. While the ultimate decision is in the hands of the investors, the brokers with their experience may assist the investors by providing some information ...