Is it halal to invest in mutual funds?

There;s a common misconception that Mutual Funds are not a Halal investment avenue. Well, this is certainly not true. Contrary to popular belief, most Mutual Funds in Pakistan have divisions which are regulated under Islamic Shariah Compliant policies.

1. All Islamic Investments are regulated by Islamic Experts

So who ensures that the investment is Halal? The most important aspect of Islamic Mutual Investments is that they are managed and supervised by renowned Islamic experts. These experts take extreme care to ensure that all aspects of the investment transactions are executed as prescribed by Shariah. This means that the investor does not have to worry about his investment not being Halal.

2. Capital is invested in Halal Equities and Securities

The investor;s capital in an Islamic Mutual Fund is invested in companies and organizations which are run under Shariah compliant policies. This rules out any concerns an investor might have related to his capital being used for unethical means.

3. Islamic Investments are Interest Free

Whenever banking is involved, one of the first concerns of any customer is interest. Being prohibited strictly by Shariah, interest is a major concern for most people. Islamic Investment Funds make returns on capital in a way that the provider is willing to share in the risks of a productive enterprise. This means that capital in a way is lent and not invested, leading to interest being the return and not the profit. This means that the investment is devoid of interest.

4. Strict Criteria for Choosing Equities is Followed

In order for an equity to be Shariah Compliant, it is necessary that the core business of the company should not violate any principle of Shariah. It is prohibited to acquire shares of companies which provide services on interest such as conventional banks, insurance companies, leasing companies. In addition to this, companies involved in certain other businesses are not approved by the Shariah, for e.g. companies making or selling liquor, pork, haram meat, or involved in gambling, etc.

Islamic Investment Funds are the perfect option for someone who wishes to save and invest to meet their short and long term financial goals. Whether it be saving for your child;s future or to go on a family vacation, with Islamic Investment Funds, you can easily do so by remaining within Shariah regulated boundaries.

How to choose mutual funds for investment? Ways to analyze mutual funds 1. Performance

An important aspect you should look at is the 'Performance Ranking' of a fund among its peers.

Rather than looking at a fund;s performance in isolation, it should be compared with similar funds on a monthly, quarterly, and annual basis. A fund that is consistently in the top quartile or decile should be preferred over others.

The past performance of funds managed by an AMC is a good indicator to see if your savings are in good hands.

2. Ratio analysis

A 'Ratio Analysis' of the fund helps in analyzing its risk and return. Ratios such as standard deviation, sharp ratio, and measurement of Alpha helps in comparing your fund of choice with the other funds on offer.

The Alpha of a fund should be of particular interest, as it will tell you how much a fund manager has been able to outperform or underperformed a benchmark. The Alpha of any given fund, along with the other ratios, is available in the monthly Fund Manager Report (FMR) published by the AMC.

The 'Total Expense Ratio' tells you about the total fund management and distribution related expenses. A higher expense ratio will adversely affect the fund;s returns and is generally not desirable.

3. Tenure and experience

The tenure of your fund's manager (AMC) and its experience and expertise are also important things to look at when selecting a fund. The fund manager is the final decision maker regarding any investment decision related to the funds. Its expertise and investing style will greatly impact the performance of a fund, and you should always try to find more out about the manager of the fund.

4. Size of the fund

The size of a mutual fund is another important factor in the selection of a fund. Funds with small Assets Under Management (AUM) are exposed to concentration risk. When a large investor exits or redeems their investment from a fund with a small AUM, the fund may be impacted adversely and the remaining small investors may have to suffer.