Why Shariah-Compliant Funds Are Also Good For Your Investment
Why Shariah-Compliant Funds Are Also Good For Your Investment

Why Shariah-Compliant Funds Are Also Good For Your Investment

Last Updated on Thursday, 1 July 2021 by Zhen Thing

Most of the time, people (specifically non-Muslims) will turn away whenever they hear about Shariah-Compliant or Islamic funds. Many think that Shariah-Compliant funds may have many “restrictions”, making them less profitable than conventional funds. Typical mindsets of the majority believe that conventional funds are “fierce” funds that are daring to invest in various industries without “restrictions” that Shariah funds have. Some even thought that Shariah-Compliant funds are only for Muslims. These statements are very untrue.

This article will explain the differences and advantages of investing in these two funds (Malaysia edition). Hopefully, you will have a better idea of what these two funds are after reading this article. Feel free to discuss your thoughts or doubts in the comments section. In addition, you may chat with us directly if you have further doubts and if you want the fastest response.

What is Shariah-Compliant fund?

By definition, a Shariah-compliant fund is a collective investment scheme that invests following the requirements of Shariah law and the principles of the Islamic religion regulated by the Securities Commission Malaysia (SC), and Shariah-compliant certified independent Shariah Adviser. Shariah funds are socially responsible investments, similar to other socially responsible funds under the Environmental, Social and Governance (ESG) index. Shariah stocks incorporate sustainable considerations in their business practices, primarily in the environmental and social aspects. Another example of an ESG fund is the Public e-Carbon Efficient Fund.

Shariah Funds are different from conventional funds because…

  • They adhere to social and moral values.
  • Investments must be in legitimate businesses.
  • They avoid investments related to interest (riba), gambling (maysir), and uncertainty (gharar).
  • They maintain transparency in transactions and contracts.
  • Financial risk is shared among all parties.

Prohibited Industries under the Shariah Law

Prohibited Under Shariah Law
Prohibited Industries under the Shariah Law

Shariah funds exclude their investments in businesses that involve:

  • Non-halal products (alcohol, pork products, tobacco).
  • Gambling.
  • Pornography
  • Military equipment or weapons.
  • Media & entertainment (that are non-permissible according to Shariah).
  • Conventional financial institutions (bank, insurance).
  • Stockbroking or share-trading in non-Shariah-compliant securities.

Sectors that Shariah-compliant funds invest in:

  • Sukuk funds.
  • Biotechnology.
  • Communication Services.
  • Healthcare.
  • Technology.
  • Telecommunications.
  • ETFs
  • REITs
  • Etc.

Conventional vs Shariah Funds

1. Sectors that they invest in.

Here, I’ll explain the sectors that conventional and Shariah funds invest in based on the funds available in Malaysia (global and domestic funds). This info may vary for other countries.

Conventional FundShariah Fund
✅ Financials & banks
✅ Telecommunications
✅ Utilities
✅ Construction & Engineering
✅ Plantation
✅ Conglomerates
✅ Hotels, Restaurants, Gaming & Leisure
✅ Healthcare & Pharmaceuticals
✅ Chemicals
✅ Real Estate
✅ Transportation
✅ Consumer
✅ Energy
✅ IT Software, Internet & Media
✅ REITs
❌ Does not invest in financials & banks
✅ Telecommunications
✅ Utilities
✅ Construction & Engineering
✅ Plantation
✅ Conglomerates
❌ Hotels, Restaurants, Gaming & Leisure
✅ Healthcare & Pharmaceuticals
✅ Chemicals
✅ Real Estate
✅ Transportation
✅ Consumer
✅ Energy
✅ IT Software, Internet & Media
✅ REITs
✅ Other sectors.✅ Automobiles & Components
✅ IT Hardware & Equipment
✅ Other sectors.

2. Advantages of each fund.

After knowing the differences of conventional and Shariah funds, we’ll talk about the advantages of each fund to help you choose your suitable investment fund wisely.

Conventional FundShariah Fund
Potentially higher returns, but
More vulnerable to volatile market conditions.
Consistent returns, and
More stable during volatile market conditions.
Opportunity to take bigger risks for bigger rewards.Recovers faster after a market downturn.
Wider range of investments, not bound by screenings or filters.Smaller impact of market uncertainties.

A short conclusion of the two types of fund:

  • An economic downturn has a more substantial effect on conventional funds in the short term.
  • An economic downturn has a lesser impact on Shariah funds but has slower growth in the long term.
  • To maximise your investments in the long-term, having both conventional and Shariah funds in your portfolio is advantageous.

Who will benefit most from a Shariah-Compliant fund?

  • Muslims who want certainty that their income is halal.
  • Investors looking to diversify their portfolio into new markets.
  • Socially responsible investors who want to avoid certain industries.

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