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KembaraXtra–Islamic Finance–Islamic Capital Market – Islamic Mutual Funds
-Islamic mutual funds function similarly to conventional mutual funds in terms of structure and management
-The key distinction is that all investments must be Shari’ah compliant
-Funds are deployed only into assets and companies that comply with Islamic principles
-Shari’ah-compliant investments are designed according to the principles of Islam
-They must be free from Riba (interest) and Gharar (excessive uncertainty or speculation)
-Investments must also avoid prohibited sectors such as alcohol,gambling,conventional banking,and non-halal activities
-Islamic mutual funds primarily invest in shares of Shari’ah-compliant joint-stock companies
-Investors collectively own portions of the underlying portfolio through fund units
-Profits earned by investors mainly arise from capital gains,which occur when the market value of the shares increases
-Some Islamic mutual funds may also distribute dividends,provided they are Shari’ah compliant and purified if necessary
-The value of an Islamic mutual fund is measured using Net Asset Value (NAV)
-NAV represents the per-unit value of the fund at a specific point in time
-It reflects the market value of all assets owned by the fund after deducting liabilities
NAV Calculation:
-NAV = (Total market value of fund assets − Total liabilities) ÷ Total number of units outstanding
Example:
-If an Islamic mutual fund owns Shari’ah-compliant shares worth USD 10 million
-And has liabilities of USD 500,000
-And 1 million units outstanding
-NAV = (10,000,000 − 500,000) ÷ 1,000,000 = USD 9.50 per unit
-Key takeaway:Islamic mutual funds provide a Shari’ah-compliant way for investors to pool funds,invest in halal equities,and earn returns through real business performance,with NAV serving as the benchmark for fund valuation
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