PBP60523

ISLAMIC WEALTH
MANAGEMENT
N A M E : A Z LY N R A B I AT U L S Y U H A D A B T A H M A D S U H A I M I
STUDENT ID : 62361219005
L E C T U R E R ’ S N A M E : A S S O C . P R O F. D R A I M I Z U L H A Z M I
 ISLAMIC MUTUAL FUNDS
Defintion
An Islamic unit trust or a mutual fund is a type of equity fund that
collects funds from investors and pools them for investment in stocks,
bonds, or other investment products. The return from the investment
is paid back to the investors proportionately after deducting the cost
related to the fund and the administration fee, or the fund’s portion of
the profit (depending on the contract used). These funds are similar to
their conventional counterparts but differ in their mode of financing
and in the nature of their investments (which must, of course, be
sharia-compliant).
• Investment funds are permissible by Shariah.
• Funds are a form of collective investment that continue throughout their
term, the rights and duties of participants are defined and restricted by the
common interest, since they relate to third parties’ rights.
• Fund is managed on the basis of agency the shareholders/unitholders waive
their right to management, redemption or liquidation except in accordance
with the limitations and conditions set out in the statutes and by-laws.
 Characteristics of an Islamic fund
In many respects, the structural characteristics of a Shariah-compliant fund will not differ from those
of a conventional investment fund. For example, the choice of legal structure for the investment
vehicle and the choice of jurisdiction will still be driven by considerations such as: 
(i) a flexible, cost-efficient regulatory framework, particularly with regard to the need to obtain
approvals from supervisory authorities and possibly seek a stock exchange listing; and
(ii) a favourable tax regime.
A primary feature of an Islamic fund is an independent Shariah board of three to five Shariah
scholars. This board will establish compliance parameters for the fund, usually prior to the
establishment of the fund and before any assets are acquired. The Shariah board will also be
responsible for publishing an annual statement which sets out how the fund has complied with
Shariah. The statutory documents of the fund need to clearly set out the roles and responsibilities of
both the Shariah board and the fund manager to avoid any potential conflicts of interest, which is an
area of particular concern to international regulators.
 TYPES OF ISLAMIC SHARIAH
MUTUAL FUNDS
Equity Fund

In an equity fund the amounts are invested in the shares of joint stock companies. The profits
are derived mainly through the capital gains by purchasing the shares and selling them when
their prices are increased. Profits are also achieved by the dividends distributed by the relevant
companies. Similarly the contemporary Shari’ah experts are almost unanimous on the point that
if all the transactions of a company are in full conformity with Shari’ah, which includes that the
company neither borrows money on interest nor keeps its surplus in an interest bearing
account, its shares can be purchased, held and sold without any hindrance from the Shari’ah
side. But evidently, such companies are very rare in the contemporary stock markets.
Commodity Fund 

The subscription amounts in commodity funds are used in purchasing different commodities for the purpose of the resale. The
profits generated by the sale are the income of the fund which is distributed pro rated among the subscribers. In order to make
this fund acceptable to Shariah, it is necessary that all the rules governing the transactions and fully complied with. For example:

1. The commodity must be owned by the seller at the time of sale, therefore, short sales where a person sells a commodity before
he owns it are not allowed in Shariah.

2. Forward sales are not allowed except in the case of salam and istisna' (For their full details my book "Islamic Finance" may be
consulted).

3. The commodities must be halal, therefore, it is not allowed to deal in wines, pork, or other prohibited materials.

4. The seller must have physical or constructive possession or the commodity he wants to sell. (Constructive possession includes
any act by which the risk of the commodity is passed on to the purchaser).

5. The price of the commodity must be fixed and known to the parties. Any price which is uncertain or is tied up with an uncertain
event renders the sale invalid.

In view of the above and similar other conditions, it may easily be understood that the transactions prevalent in the contemporary
commodity markets, specially in the futures commodity markets do not comply with these conditions. Therefore, an Islamic
Commodity Fund cannot enter into such transactions. However, if there are genuine commodity transactions observing all the
requirements of Shariah, including the above conditions, a commodity fund may well be established. The units of such fund can
also be traded in with the condition that the portfolio owns some commodities at all times.
Mudarabah Fund

In the Mudarabah fund the amount may be invested in a specific business activity on the basis of
profit and loss sharing. 

Murabaha Fund

This kind of sale has been adopted by the contemporary Islamic banks and financial institutions as a
mode of financing. They purchase the commodity for the benefit of their clients, and then sell it to
them on the basis of deferred payment at an agreed margin of profit added to the cost. If a fund is
created to undertake this kind of sale, it should be a closed-end fund and its units can not be
negotiable in a secondary market.
Ijarah Fund

The Ijarah Fund will involve in companies dealing in the leasing of assets according to Shari’ah
principles. The ownership of these assets remains with the Fund and the rentals are charged from
the users. These rentals are the source of income for the fund which is distributed pro rated to the
investors.

Mixed Fund

Another type of Islamic Fund maybe of a nature where the subscription amounts are employed in
different types of investments, like equities, leasing, commodities, etc. This may be called a Mixed
Islamic Fund. In this case if the tangible assets of the Fund are more than 51% while the liquidity and
debts are less than 50% the units of the fund may be negotiable. However, if the proportion of
liquidity and debts exceeds 50%, its units cannot be traded in according to the majority of the
contemporary scholars. In this case the Fund must be a closed-end Fund.
STRUCTURE OF ISLAMIC MUTUAL
FUNDS
HALAL INVESTMENT
 KEY TRENDS I ISLAMIC MUTUAL
FUND
Shariah boards
Shariah funds must also appoint a Shariah board to provide guidance to the directors of the fund and
to the investment manager on matters of Shariah law and, in particular, whether the proposed
investments of the fund are Shariah-compliant. This is often not a simple matter because different
scholars hold sway depending on the jurisdiction. It is important for the branding of the fund to
select the appropriate scholar. In essence, this selection is part of the marketing mix.
Shariah audit
Shariah-compliant funds have to be audited on an annual basis to ensure that they are adhering to
Shariah principles. The audit is carried out either by the scholars or an outside party, although best
practice leans towards the latter because of the perceived conflict of interest. Indeed, some investors
have started to question if potential conflicts of interest may impact the integrity of the assets and
the whole fund strategy.
Purification
Income generated by a Shariah-compliant fund must also be ‘purified’ as it is often unavoidable that
some of the income generated by the underlying companies in which a Shariah fund invests will
include some form of non-halal income such as interest.16 The Shariah board’s input is again
necessary in determining the types of income that need to be purified. The amounts purified should,
under Islam
Screening
Securities screening is a further issue. It is important for all funds, but a particular issue for index
funds that invest in large numbers of securities. The aim of these funds is to make the process
systematic so that mistakes are avoided and resources conserved. Much resource is currently being
devoted to developing a global automated system. The challenge for such a system is that all stocks
are deemed non-compliant until proven otherwise. Screening methodology and processes need to
be transparent and auditable if they are to be accepted by the Islamic community. ic finance
principles, be donated to charity
Custody
Although the custodian of a Shariah-compliant fund does not itself need to operate
along the lines of an Islamic bank, it must service the Shariah-compliant fund
without violating Shariah principles. Funds are not allowed to receive interest
offered by time deposits or to enter into repo contracts. So the assets must either
be placed in a non-interest-bearing account or in a commodities contract with a
bank. This involves a simultaneous purchase and sale, which allows the fund to earn
a return.
Trading
Similarly, in the case of a failed trade, an interest charge would normally apply to
the client in a conventional fund structure. But this cannot take place in Shariah
finance, so an alternative process is required, such as the imposition of a fee.
 REFERENCES
http://eurekahedge.blogspot.com/2010/01/overview-of-2009-key-trends-in-islamic.html
https://www.mondaq.com/Finance-and-Banking/645142/Islamic-Funds-Shariah-Structuring-A
nd-Compliance
file:///C:/Users/USER/Downloads/chapter6-islamicfundmanagement-170309035501.pdf
http://www.comcec.org/en/wp-content/uploads/2018/11/11-FIN-AN.pdf
https://www.dummies.com/personal-finance/islamic-finance/the-islamic-unit-trust-and-
https://islamicmarkets.com/education/category/islamic-investment-fundsmutual-funds-market/
THANK YOU