Islamic Capital Markets: Theory and Practice

Chapter 13

Mutual Funds

Mutual funds are important institutions of capital markets. They may be assimilated to banking institutions to the extent they receive savings and deploy the savings into investment in stocks, bonds, and sukuks. Similar to banks, mutual funds are highly regulated by the Securities Commission. Contrary to commercial banks, they do not hold deposit or saving accounts and do not extend loans. Consequently, mutual funds do not create and destroy money through the credit multiplier process; they do not guarantee a fixed yield, nor do they guarantee the value of their shares. Their customers’ holdings are purely savings and are not checking deposits. Mutual funds are risk-sharing vehicles that operate on similar principles as pension funds. They invest in securities, and their risk is related to the market and credit risk of the securities. Savings are deployed into investment and not consumption. Accordingly, mutual funds contribute to capital formation and economic growth. Mutual funds face less risk than banks, and do not require a lender of last resort. Banks may have a large duration gap between assets and liabilities, may see their assets depreciate while their liabilities remain unchanged, and may face bankruptcy. They may have a mismatch of assets and liabilities. Mutual funds do not have an asset-liability mismatch and do not have a duration gap between assets and liabilities. Their shares are redeemable on demand at market value. Corporations and governments ...