What are Halal Mutual Funds?
Islamic Investment funds are a type of Shariah-compliant funds, which refers to a joint pool where investors contribute their surplus money to invest and earn halal profits. In Islamic or halal mutual funds, investment is made in shares of joint stock companies, and profits are earned through capital gains in the share value, and the dividends are distributed by those companies. Subscribers of Islamic investment funds receive a document certifying their subscription. This document may be called “Certification,” “Share”, or “Unit,” and in Islamic Shariah, its validity is always subject to the following two conditions:
First Condition
Subscribers should clearly understand that the returns are tied up with the sharing of actual profit or loss. However, if the losses are due to the negligence of management then they are not liable to compensate it.
Second Condition
Halal mutual funds must be invested in Shariah compliant business. And all channels of investment, as well as the business terms must conform to the principles of Islamic banking and finance.
Conditions for Investing in Halal Mutual Funds
Dealing in the shares of Shariah-compliant mutual funds is acceptable in Shariah law under the following two conditions:
- Nature of Business of that company must be Shariah compliant (such as Construction or Export of Halal Meat), and,
- Company is not involved in prohibited elements or activities (such as Riba or Gambling).
Types of Halal Mutual Funds
1. Ijarah Funds
The Ijarah funds are based on the concept of Ijarah. Subscription amount is used to purchase assets, such as Real Estate, Vehicle or Machinery, and they are leased out to users. The Ijarah funds own the assets, and rentals are the profit of the subscribers.
2. Commodities Funds
The Islamic commodity funds are based on commodities, and the subscription amount is used to purchase different commodities, for resale. Profit generated by the resale is considered as the income, and it is distributed among the subscribers of funds.
3. Murabahah Funds
In the Murabahah funds, Islamic banks purchase assets to benefit their clients, and sell it to them on deferred payment, and an agreed profit is added to the cost. The Murabaha funds are Closed-End Funds, and due to the nature of Murabahah, their units cannot be negotiated in the secondary market.
4. Mixed Islamic Funds
In the mixed Islamic investment funds, the subscription amount is employed in different types of investments, such as, such as Equities, Leasing, Commodities, etc. The share of mixed Islamic investment funds is negotiable in the market, only if the tangible assets of the fund are 51% or more, while the liquidity and debts are 49% or less.
Management of Halal Mutual Funds:
The Islamic funds may be managed through one of the following two ways:
1. Management of Islamic Funds as Mudharib
If managers of Shairah compliant funds act as Mudharib for the subscribers, they are rewarded by certain percentage of annual profit. The management gets its share only if the Islamic funds earn profits, and they get nothing otherwise.
2. Management of Islamic Investment Funds as Agent
If Islamic fund managers act as subscribers’ agents, they are rewarded with a pre-agreed fee for these services, which may be paid in a lump sum or on a monthly basis.
Halal Mutual Funds VS Conventional Mutual Funds
Conventional mutual funds tend to be focused on just about any type of investment. You don’t have any particular things that will stop you. The idea is that you can invest in anything you want and make profits fast and easily. It sounds great, but if you want to help the local community, this will not be for you.
This is why the Shariah-compliant funds are very popular. They can help you get the right value and experience all the time, which will ultimately work to your own advantage. Worth your time, and the outcome can be a very good one. Plus, the great thing is that you can invest in the local community and help Islamic companies grow. This is very important because there are many companies that are in dire need of help, and you are the best one to provide that help to them at all times!
Why is the Demand for Halal Mutual Funds Growing?
As you know, there are many Islamic communities all over the globe. With help from this type of investment fund, you get to eliminate the hassle and focus on what really matters. You have the unique opportunity to deliver the financial influx that Islamic companies need. All you need to do is access Shariah-compliant investment funds. Do that, and focus on results. The experience can be second to none, for sure!
Should You Consider Investing in Shariah-Compliant Funds?
Just consider that, focus on value, and you will be able to help the local community grow very fast. This is very important and it provides you with a great set of benefits in this regard. If you want to learn more about Islamic banking and financial system, you may choose to study diploma Islamic banking – which is an internationally recognized professional development programs. AIMS program is designed to prepare highly qualified Islamic finance experts.
11 Best Halal Investment Options
There are several halal investment options available to investors seeking Sharia-compliant investment opportunities. These include:
1. Halal Mutual Funds
These funds are managed according to Sharia law, meaning they only invest in companies that comply with Islamic guidelines.
2. Islamic Bonds (Sukuk)
Sukuk are bonds that comply with Islamic laws against interest.
3. Halal Stocks
Investing in halal stocks implies that the company does not deal with haram elements and ensures its compliance with Shariah law.
4. Gold/Silver
Precious metals like silver and gold in Islam are considered halal investments. These tangible assets hold intrinsic value and can act as a hedge against inflation. However, trading methods should be aligned with Islamic principles, and avoid forbidden practices like speculative trading (Gharar).
5. Real Estate
Investing in properties, whether residential or commercial, is a popular halal investment strategy. Profits can be derived from rental income or capital appreciation.
6. Exchange Traded Funds (ETFs)
Investment in only those Sharia-compliant ETFs that are certified as halal by a reputable Islamic financial institution.
7. Halal Start-up Investments
Investing in start-up businesses that operate in line with Islamic principles can also be a profitable venture. However, one should ensure that business activities and financing modes are Sharia-compliant.
8. Islamic Forex Trading
Forex trading, or currency trading, can be done in a halal manner, and all transactions must be free from interest (Riba), uncertainty (Gharar), and gambling (Maysir).
9. Islamic Peer-to-Peer Lending
This is a form of investment can be done through Murabaha contract, where the buying and selling price, along with the profit margin, is clearly stated.
10. Halal Real Estate Investment Trusts (REITs)
Similar to property investments, REITs can also be utilized as a halal investment strategy.
11. Crowdfunding
Similar to peer-to-peer lending, crowdfunding allows individuals to invest in Shariah-compliant businesses or projects. The profit share should be based on a pre-determined agreement between the investors and the business owners.
AAOIFI Accounting Standards for Halal Mutual Funds:
This standard is applied to:
- Islamic funds that are established and managed under Islamic Shariah.
And, it is not applied to:
- Funds in the statement of financial position of establishing institution; and;
- Funds of restricted investment accounts, that are not in the form of shares or units.
A. Financial Statements:
They should contain the following:
B. Statement of Net Assets:
It shall comprise all assets and liabilities, at the end of the financial period.
C. Statement of Portfolio Investments, Receivables, and Financing:
It shall report the amount of each type of asset held.
D. Statement of Operations:
It shall report the increase or decrease in net assets, resulting from the operations.
E. Statement of Changes in Net Assets, or Statement of Cash Flow:
It shall provide information about changes in assets and liabilities, resulting from investments, receivables, financing activities, and share transactions.
F. Statement of Selected Financial Highlights:
This report should precede the notes about Fund’s shares, at the end of the financial period.
G. Disclosure in the Notes to the Financial Statements:
Disclosure shall contain the following: Type of Fund, Main activity, Investment Policies that govern Investment Activities; and; Investment objectives.
H. Comparative Amounts in the Financial Statements:
It includes the financial statements of the comparable prior periods.
I. Real Estate Assets in Funds:
- Real estate assets shall be measured at historical cost, plus any direct expenses related to the ownership.
- Assets shall be revalued at their cash equivalent values.