Comparative Analysis Of Islamic And Conventional Mutual Funds Finance Essay

A common fund is a pool of money, collected from investors, and is invested harmonizing to certain investing aims. Karachi stock market has shown enormous growing in footings of volume since 1991. The volume of portions traded in KSE has increased from 2 million portions in 1991 to more than 100 million portions in 2010. This growing in the capital market attracted both local and foreign investors. Risk antipathetic attitude in bulk of the local investors who are loath to pull off their ain portfolio of securities has given encouragement to common fund industry in Pakistan.

Investors opt for common financess owing to see and professional fund direction, diversified portfolio, economic systems of graduated table and hazard variegation, liquidness, convenient processing, affordability ( little investors can besides put ) , transparence and stringent regulative demands.

On the other manus, several challenges are being faced by Common Fundss in Pakistan. These include deficiency of diversified merchandise scope, trouble in understanding of investors ‘ demand, public consciousness at mass degree, in-stability of stock market, famine of liquid debt instruments, guaranting consistent public presentation, supplying competitory returns, extenuating the hazard involved, unequal rational capital, soothing and converting with bad past investing, low economy and investing oriented society, information revelation and transparence and right timing to establish financess.

A strong desire for Islamic common financess has besides been witnessed in the private sector. Investing in Islamic financess besides provides attractive and hazard adjusted returns through puting in Sharia’h compliant income instruments.

Structure of the Mutual fund

Common Fundss are operated by Asset Management Companies ( AMC ) which exists in the signifier of a corporation, owned by its stockholders. The AMC launches new financess through the constitution of a Trust Deed, entered between the Asset Management Company and the Trustee, which in most instances is the Cardinal Depository Company of Pakistan Limited, with due blessing from the SECP under the Non-Banking Finance Companies ( Establishment and Regulation ) Rules, 2003 ( the “ Rules ” ) . The CDC performs the maps of the custodian and legal guardian, whereas, the AMC can move as the registrar or can name an external registrar. Banking/ fiscal companies may be authorized to move as distributors/ gross revenues agents. The Board of Directors must besides O.K. and name a legal adviser and hearer for legal and conformity personal businesss ( MUFAP, n.d. ) .

Figure 1: General procedure of puting in common financess

Types of Mutual Fundss

With regard to pick of salvation, there are two classs of common financess: Closed terminal and unfastened terminal financess.

Open-end Fundss: These financess are in an on-going procedure of publishing and delivering units on demand. The units do non merchandise in a market. The figure of units outstanding varies each clip the net plus rating computation is carried out, which is day-to-day for most open-ended financess.

Closed-end Fundss: Closed-end financess publish a specific figure of units. Their capitalisation is fixed. The units are non redeemable, but are readily movable and traded on either a stock exchange or the nonprescription market. The monetary value of a closed-end fund portion fluctuates based on investor supply and demand. Closed-end financess are non required to deliver units.

With regard to investing aims, there are several types of financess available including money market fund, index financess, balanced financess, income fund, sector financess, stock financess, pension financess, hard currency financess, crowned head financess etc. Almost all these types of financess are besides available in the Islamic financess class.

Advantages of Investing in Mutual Fundss

The volume of portions traded in KSE has increased from 2 million portions in 1991 to more than 100 million portions in 2010 ; Karachi stock market has shown enormous growing in footings of volume since 1991. This growing in the capital market attracted both local and foreign investors.

The capital market non merely opened several avenues of investing, but besides gave way to investors towards other fiscal markets every bit good. The investing in the fiscal markets is really hazardous. The investors opt to put in common financess due to this hazard aversive attitude as they are loath to pull off their ain portfolio of securities.

The floatation of big figure of TFCs is a clear manifestation of the corporate sector ‘s penchant of mobilising financess through debt instruments instead than borrowing from fiscal establishments. Following are some major grounds to put in common financess: ( MUFAP, n.d. )

vA Diverseness

Diversification of portfolio minimizes the unsystematic hazard which fundamentally arises due to concentration of investing in peculiar industry or plus category.

vA Affordability

Diversified portfolio portions the fruit of puting in high monetary value plus category which is otherwise non possible to afford individually with comparatively smaller sum of money. Specially, it gives the chance to little investors to include high priced assets in their portfolio.

vA Professional Management

All investors do non needfully possess the same expertness and accomplishments to pull off their ain portfolio. It needs clip and particular proficient accomplishments to analyse 1000s of securities available in the fiscal market and to measure their returns on a regular footing.

vA Liquid

The units or sharesA of common fundsA can be traded in secondary market. Therefore, the investing in common financess is more liquid.

vA Flexibility

Common fund provides an chance to exchange investing from one plus category to another with regard to put on the line taking appetite.

Common Fundss in Pakistan

Constitution of Common financess industry in Pakistan dates back to 1962 when the first unfastened terminal equity fund was launched by the National Investment Trust. Then in 1966, the Government of Pakistan established Investment Corporation of Pakistan which launched several closed terminal financess. Subsequently in 1990 ‘s, important addition in the figure of common financess was seen in the private sector. The history of Islamic common financess in Pakistan is brief, but the advancement so far achieved is outstanding, when compared to the advancement achieved in other states.

The enviable growing of the Islamic fiscal system can be attributed to the proactive attack of the regulators and a batch of attempt being done by the market participants. Achieving one after another milepost would non hold been possible without the dedicated due diligence by the fraternity of Sharia’h bookmans.

As of June 30, 2009, the entire figure of financess in common financess industry recorded was 101 from which 81 were open-ended and 20 were closed terminal. Furthermore, there were 29 AMC/IAs runing in this industry with entire plus size of PKR 227 billion ( Securities and Exchange Commission of Pakistan, 2009 )

Factors of Growth in Islamic Mutual Fundss

Islamic Sharia’h Boards are showing greater apprehension.

The Islamic Mutual financess are bring forthing better returns with sound investing policies and reluctance in investings into extremely leveraged companies.

The conventional banking industry is emulating the Islamic investing instruments and naming Sharia’h Board Advisors for Sharia’h conformity.

Conventional Bankss are besides offering Islamic finance merchandises and this tendency is besides go oning in common financess industry whereby several AMCs have launched Islamic financess side by side.

Regulatory Framework for Mutual Funds in Pakistan

There are three regulative paperss regulating common financess in Pakistan,

Investing Companies and Investment Advisors ‘ Rules, 1971. ( Govern closed-end common financess ) .

Asset Management Companies Rules, 1995. ( Govern open-ended common financess ) .

NBFC Rules 2003 ( For Constitutions and Regulations ) .

Industry Analysis

Between 2002 and 2008, common financess in Pakistan have shown rapid growing in footings of net assets. This rapid growing was achieved chiefly due to liberalisation of common fund sector, heavy net incomes in the corporate sector amidst economic roar in the period, handiness of liquid financess in the economic system, macroeconomic stableness and reaching of foreign investing in floaty stock market.

More inclusion of the private sector in common fund industry has brought competition, efficiency and improved fund direction expertness. After the stock market debacle in 2008, the tendency in common fund industry has declined in 2009. The net assets of the common fund industry in Pakistan has been recorded Rs. 227 billion in 2009. The chief determiners of this deteriorating tendency are economic and political instability in the state, deficiency of economic way, immense non-performing loans in the fiscal sector and heavy losingss in the corporate sector. The uncertainness in the value of local currency has deterred both the foreign and local investors.

Figure 2 Asset Under Management of the common financess industry ( in one million millions PKR )

Beginning: Common Funds Association of Pakistan,

In add-on, the local common financess industry appreciated by 6.4 % in Jul-10 to shut at Rs 212 Billion. On a MoM footing, the positive figure in growing was witnessed after three months, when the industry showed an grasp instead than a worsening tendency since April 2010. Comparing the industry size to December 2009 degree of Rs. 225 Billion, the industry still lags behind by 5.7 % . Since the proclamation of the Capital Gain Tax ( CGT ) execution on equities, investors have been switching their financess more towards the income and money market financess classs.

In Pakistan, Islamic common financess can be invested in 100 Sharia’h compliant companies listed on KSE. The listing is updated biyearly in June and in December. The KSE and Al-Meezan Investment Management Limited launched the first Muslim index of Pakistan known as KMI-30 in September 2008 which comprises companies selected on the footing of Shariah testing regulations. In add-on to the Sharia’h showing standards, the inclusion of scrips in KMI-30 is based on two standards ; free float methodological analysis and impact cost. The scrips with high free float and impact costs are taken in, provided they are Sharia’h compliant every bit good.

Figure 3: Performance of Common financess in 2010

( Beginning: FMR, Invest Cap Research )

Performance of Income Fundss

During 2010, Income fund public presentation can be presumed from following graph which depicts that financess peaked in Feb 2010 and were lowest in June 2010.

Figure 4: Income Fundss Performance during FMCY10

( Beginning: FMR, Invest Cap Research )

The chief ground for the class to gain a better return during the month was that, some TFCs and Sukuks had been upgraded from the non-performing assets to the rated instruments.

Figure 5: The top-10 income financess with annualized returns earned during July 2010

( Beginning: FMR, Invest Cap Research )

Equity Fundss Performance

In July 2010, the KSE100 index appreciated by 8.4 % but the equity financess class grew nevertheless by merely 4.7 % .

Figure 6: Equity Fundss Performance during July 2010

( Beginning: FMR, Invest Cap Research )

Figure 7: The top-10 equity financess with annualized returns earned during July 2010.

( Beginning: FMR, Invest Cap Research )

Islamic common financess

Interest in Islamic common financess has developed chiefly due to a fatwa on investing banking issued by the Islamic Jurisprudence ; Karachi stock market has shown enormous growing in footings of volume since 1991 ( MUFAP, n.d. ) .

Muslim Income Fundss

The aim of this fund is to seek protection of capital and gain a sensible rate of return in a Sharia’h compliant mode. The aim is achieved by puting in Islamic income investings holding good worth and liquidness. The fund encompasses investing of assorted investing skylines, with a important sum invested in short-run investings for the intent of keeping liquidness.

Asset category where Islamic income financess can non put

Asset category where Islamic income financess can put

Conventional Bonds / Term Finance Certificates


Treasury Bills ( T-Bills )

Islamic banking arrangement

Pakistan Investment Bonds ( PIB )

Musharaka Certificate


Commodity Murabaha

Continuous Funding Schemes ( CFS )

Currency Trade

Federal Investment Bonds ( FIB )


Muslim Equity Fundss

Islamic Equity fund invests in both growing and value stocks listed in Pakistan. The Fund seeks to accomplish long-run capital grasp chiefly from growing stocks. In Pakistan, common financess work under the Sharia’h principal of Wakala bil Istithmar ( Investment bureau ) . Under this principal the obligor ( AMC ) is an investing agent andA all the losingss unless due to fraud or carelessness are borne by investors and the rate of return are variable.

Muslim equity financess prohibits the investing in companies whose income is made from Gambling, Alcoholic drinks, Financial loaning for involvement, either with or without hazard, derived functions, selling short or any other method in struggle with Islamic Law. Besides, the loaning and adoption at involvement ( purchase ) is impermissible. The principal of Sharia’h does non let ‘interest ‘ to be considered as a portion of the cost of a merchandise or service, it does non add to the terminal value and plays no portion in the commercial system


The investing in common financess has increased dramatically as there has been great consciousness of the benefits of diversified portfolio under professional direction with precaution of legal guardian supervising and regulative model as whole.

In Pakistan, Industry has witnessed great support of investors that shows assurance on Common financess. Investors have option to choose fund of their pick and can take between Conventional and Islamic common fund. The net assets of the common fund industry in Pakistan has been recorded Rs. 227 billion in 2009 and still the figure is turning.

Keeping in position the investing volume and impact it has on economic system, triggers the demand to analyze common financess. Assorted surveies have been conducted arousing the public presentation of common financess but really few surveies have been conducted to lucubrate Islamic common financess ‘ public presentation. In this survey, public presentation of Islamic and conventional common financess is analyzed and compared on the footing of profitableness and volatility that will assist general populace and interest holders of common fund to understand the phenomena of said financess.


Given the fact that there exist legion structural and regulative differences between Islamic and conventional common financess, there is a demand to analyze whether these differences reflect besides in profitableness and monetary value volatility between Islamic and conventional common financess runing in Pakistan


To research regulative and structural differences between Conventional and Islamic common financess runing in Pakistan.

To analyze and compare the profitableness and volatility of both types of financess.

To look into and analyse the impact of structural and regulative differences on profitableness and volatility.


The importance of survey can be acknowledged from the growing of Common financess industry in Pakistan during the last five old ages. KSE – 100 Index crossed over 15,000 points in 2008 and Islamic finance industry is turning at a rate in surplus of 15 % . A state with 97 % Muslim population and prevalence of pan Islamism sentiments, the hereafter for Islamic common financess industry bode good. Conventional common financess are besides booming after two terrible prostrations in equity market in 2005 and 2008 severally. This survey greatly contributes in understanding the differences between Islamic and conventional common financess and to analyse the variables that cause both financess to execute otherwise.


This survey is confined to Income and Equity financess merely andA other classs of financess are non taken into consideration.


This survey is explorative and quantitative in nature with strong accent on analysis. Performance of Islamic and conventional financess with regard to structural and regulative differences is compared through 5 twelvemonth informations on equity and income financess for both Islamic and conventional financess. Performance is measured through Net Asset Value ( NAV ) . Volatility is measured through standard divergence in peculiar and several ratios are calculated for extended analysis.


Study is limited to Pakistan merely. There are really few differences between conventional and Muslim common financess maintaining in position the limited investing avenues as both types of financess invest about in same instruments. Hence, the profitableness of both financess could likely resemble to each other despite the structural and regulative differences.

Chapter 2


Interest in Islamic common financess has developed chiefly due to a fatwa on investing banking issued by the Islamic Jurisprudence Academy in Saudi Arabia. The finding of fact ruled that, within certain parametric quantities, equity investing was acceptable under Sharia’h.

Shaikh ( 2010 ) explained certain standards for Investee Company for Islamic common financess which are as follows:

Nature of Business

The concern of the company where investing is made should be Halal. Like investing in the portions of conventional Bankss, insurance companies, renting companies, companies covering in intoxicant and baccy etc. are non allowed.

Minimal Market Price per portion

Market monetary value of the portion must be greater than the net liquid assets per portion. It means that the extra liquid financess of the company should be invested in its operations i.e. to purchase the assets for which the company acquired financess from the general populace.

The expression to cipher for measuring a company based on this standard is as follows:

The Net Liquid Assets / Share = ( Total. Assets – Fixed. Assets – Inventory – Current Liabilities – Long Term Liabilities ) / No. of portions outstanding

Minimum Illiquid Assetss

Illiquid Assetss are touchable assets which are non liquid that include Fixed assets. Examples include works, machinery, stock list, edifice, furniture, fixtures etc. It implies that the company should put the financess it generates from the populace to put in the touchable assets.

The expression to cipher for measuring a company based on this standard is as follows:

The Illiquid Assets = Total Assets – Liquid Assets ( Cash, Cash equivalents, Histories Receivables, Advances ) .

Cap on Sharia’h Non-Compliant Income

Non-Compliant Income includes involvement ; income from chancing, conventional involvement based derived functions, structured merchandises, income from cabarets, casinos, baccy, intoxicant, drugs and dividend income from above mentioned concerns etc should be less than 5 % of entire gross gross.

Requirement for Non-Sharia’h Compliant Investment

Non-Sharia’h Compliant Investments include investings in money market financess, money market instruments, bonds, PIBs, FIBs, CoIs, CoDs, TFCs, DSCs, conventional bad derived functions and structured merchandises etc. These should be less than 33 % of entire assets.

Cap on Interest Bearing Debts

Interest Bearing Debt includes Bonds, TFCs, Conventional Bank Loans, Finance Lease, and penchant portions etc. In Pakistan, the consensus of Sharia’h Advisors is that over all, involvement bearing debt of company should be less than 40 % of entire assets. Previously, it was 45 % of entire assets and tightened on the given that the companies, progressively, have better and accessible Sharia’h compliant options now than earlier.

Explaining the difference between an Islamic and conventional common fund, El-Gamal ( 2000 ) conducted a survey stated that an Islamic common fund is similar to a “ conventional ” common fund in many ways ; nevertheless, unlike its “ conventional ” opposite number, an Islamic common fund must conform to the Sharia’h ( Islamic jurisprudence ) investing principles. The Sharia’h encourages the usage of net income sharing and partnership strategies, and forbids riba ( involvement ) , maysir ( chancing and pure games of opportunity ) , and gharar ( selling something that is non owned or that can non be described in accurate item ; i.e. , in footings of type, size, and sum ) . When choosing investings for their portfolio ( plus allotment ) , conventional common financess can freely take between involvement based investings and non-interest based investings, and can put across the wide spectrum of all available industries.

An Islamic common fund, nevertheless, must put up screens in order to choose those companies that meet its qualitative and quantitative standards set by Sharia’h guidelines. Qualitative screens are used to filtrate out companies based on the nature of their concern ( e.g. , houses bring forthing or selling intoxicant, and biotechnology houses utilizing aborted embryos and human cloning ) , or securities that contain one of the Sharia’h prohibited elements ( e.g. , affecting riba, maysir or gharar ) as explained earlier ; or companies that conduct unethical concern patterns as per Sharia’h ( Ahmed, 2001 ) .

Therefore, excluded from Islamic-approved securities are fixed income instruments such as corporate bonds, exchequer bonds and measures, certifications of sedimentation ( CDs ) , preferable stocks, warrants, and some derived functions ( e.g. , options ) . Furthermore, Islamic common financess can non merchandise on border ; in other words, they can non utilize interest-paying debt to finance their investings. It is besides non allowable to prosecute in sale and redemption understandings ( El-Gamal, 2000 )

In add-on, he farther articulates that, unlike conventional common fund directors, Islamic fund directors are non allowed to theorize. An Muslim economic unit is expected to presume hazard after doing a proper appraisal of the hazard with the aid of information. Merely in the absence of information or under conditions of uncertainness is guess kindred to a game of opportunity and is condemnable.


With regard to the public presentation, Hamilton, Jo and Statman ( 1993 ) compared the public presentation of 32 American Islamic financess to that of 170 conventional financess over a 10 twelvemonth period. They found that the mean return for the Islamic financess is found to be higher than the mean returns of the conventional, proposing that investors do non lose by puting in similar Islamic financess ( Shaikh, 2010 ) .

Elfakhani and Hassan ( 2005 ) province that, comparing the profitableness of Islamic and conventional Mutual Funds, the research conducted by Reyes and Grieb in 1998, found that mean return for the Islamic common fund is far superior to that of conventional one hence corroborating the consequences of Hamilton and Statman.

Ferdian and Dewi ( n.d. ) articulate the consequences of the research pursued on public presentation of both Malaysian Islamic and conventional common financess. This survey found that during the period of January 2nd, 1997 to February 26th, 1999, Islamic common financess performed better as compared to the conventional common financess. Besides that, his survey uncovered that Malayan Islamic common financess outperformed all of their benchmarks, viz. KLCI, RHB Islamic Index and KLSE Composite Index.

Ferdian and Dewi ( n.d. ) claims that, in the period of January 2002 to December 2003, Indonesian equity Islamic common financess outperformed the market ( JII ) . This determination was supported by the consequence of public presentation measuring which calculated by utilizing Sharpe, Treynor, and Jensen indices. All of the three indices show positive value, which means that all equity Islamic common financess performed better than their benchmark.

In another survey of Ferdian and Dewi ( n.d ) conducted survey on comparative analysis of Islamic and Conventional Mutual financess, they found that during 2001 to 2002, the public presentation of equity Islamic common financess were higher than equity conventional common financess.

The findings of Hoepner et Al. ( 2009 ) survey reveals that, in western markets, Islamic equity financess appear to drag their equity market benchmark returns on norm. Furthermore, Western Islamic financess are significantly exposed to a little stock penchant. In contrast, Islamic financess from states with a important Muslim population neither underperform their equity market benchmarks nor see a little cap penchant.

The survey besides found some grounds about the form of investing in assets with a low debt to equity ratio. This may assist explicate the strong public presentation of the Islamic fiscal sector during economic downswings. As Muslim financess tend to avoid puting in high hazard assets ( due to uncertainness or gharar ) they tend to be less affected during economic crises than investings in high risk/high return assets. This grounds is non merely of import for Islamic fund directors but besides points conventional fund directors to the chances to fudge their portfolios against crises by puting in Islamic financess.

The writer finds the grounds back uping the position that Islamic investors from preponderantly Muslim states ( i.e. GCC states and Malaysia ) do non give fiscal returns by puting actively in line with their spiritual rules. Furthermore they find some grounds that Islamic investors in some states ( e.g. Bahrain, Saudi Arabia ) experience a superior protection against overall equity market losingss.

A utile reappraisal of the literature in the article by Chang and Witte ( 2005 ) jointing that Camejo in twelvemonth 2002 and Harrington in 1992 suggested that socially responsible investment may bring forth higher risk-adjusted portfolio returns relative to utilizing all available stocks in the equity existence.

Islamic investing merchandises are normally perceived to underachieve conventional plus categories due to limitations on investing avenues and the overall conservativism of portfolios. But the MSCI World Islamic Index has managed to surpass the conventional MSCI World Index over the last 13 quarters due to its focal point on low-debt companies and non-financial stocks ( Pasha & A ; Nair, 2010 ) .

Analyzing the public presentation of stopping point ended financess in Pakistan in the twelvemonth 2006, Sipra evaluated the public presentation of close-ended common financess in Pakistan based on the information for the period 1995 to 2004 and reported that harmonizing to Jensen and Treynor steps, about half of the financess outperformed the market portfolio over the last five old ages ( Afza & A ; Rauf, 2009 ) .


Hong and Kacperczyk ( 2009 ) , conducted survey on public presentation analysis of Islamic and conventional common financess They concluded that stocks ( intoxicant, gaming, baccy ) excluded by Islamic financess to present significantly, deliver positive unnatural returns.

Hussein ( 2004 ) states that, oppositions of Islamic investors highlight the inauspicious costs and affects that ethical showing may affect. They argue that the possible hidden costs associated with implementing ethical screens adversely affect investing public presentation and hence should non be ignored. They perceived that cost associated with showing of Islamic investings reduces the net return yielded.


Hussein ( 2004 ) states that, oppositions of Islamic puting highlight the inauspicious costs and affects that ethical showing may affect. They argue that the possible hidden costs associated with implementing ethical screens adversely affect investing public presentation and hence should non be ignored.

Unscreened benchmarks may surpass ethical investing since utilizing ethical puting standards may do extra showing and monitoring costs, handiness of a smaller investing existence and restricted potency for variegation.

He farther describes the comparing of the returns of DSI to two broad-based benchmark portfolios: S & A ; P 500 and Chicago Centre for Research in Security Prices ( CRSP ) Value Weighted Market indices. His consequences showed that extra showing and monitoring costs associated with implementing social-responsibility screens does non needfully ensue in higher volatility and decreased returns. The restricted investing may affect higher hazard but, it should non give significantly worse returns since investors do non put in clearly unprofitable stock.

Ahmed ( 2009 ) quoted in his survey “ Islamic Mutual fund constructions ” that some bookmans allow partly “ contaminated ” gaining income to be cleansed or purified. For case, modern-day bookmans allow investing in stocks of companies with tolerable ( i.e. , kept at a minimal proportion ) sum of involvement income or with tolerable grosss from unacceptable concern activities if all “ impure ” net incomes is “ cleansed ” by giving it off to charity. If, for illustration, the company has 3 per centum interest-related income, so 3 per centum of every dividend payment must be given off to “ sublimate ” the fund net incomes.

Cleansing capital additions, nevertheless, remains problematic as some bookmans argue this is non necessary since the alteration in the stock monetary value does non truly reflect involvement. While others suggest that it is safer and more just to sublimate net incomes made from selling portions every bit good. This purification procedure is done either by the fund director before any distribution of income, or by describing the necessary fiscal ratios for investors to sublimate net incomes on their ain ( Elfakhani & A ; Hassan, 2005 ) .

On the issue of corporate administration, a survey conducted by Cheema and Shah in 2006 about Pakistani fund industry utilizing the one-year informations for 1994-2004 period concluded that the sufficient protection of minority investors can merely be possible if institutional investors in general and common financess in peculiar drama a important function in corporate administration. This survey is of peculiar importance associating to our research as we will be analysing the structural and regulative differences between conventional and Muslim common financess ‘ public presentation.

Sing differences in public presentation with regard to type of financess, Afza and Rauf ( 2009 ) further inform that Glenn ( 2004 ) argued that since open-ended financess face the possibility of salvations, it has to maintain more of its assets in the signifier of hard currency. Therefore, an open-ended fund will hold comparatively less money invested than a close-ended fund, which may ensue in lower returns for the unfastened ended common financess.

Sing determiners of high public presentation, Afza and Rauf ( 2009 ) inform in their article that, Ramasamy ( 2003 ) surveyed the comparative importance of assorted factors in the choice of Islamic common financess by fiscal advisers in Malaysia and concluded that consistent past public presentation, size of the fund and cost of dealing were the three of import factors act uponing the fund public presentation.

Following, we move on to advert some contentions in Islamic Mutual fund industry. Several surveies have been conducted demoing that public presentation of Islamic and conventional common financess is the same. Studies which measure the public presentation of Islamic common financess are still scarce as compared to surveies on the conventional opposite numbers.

The survey by Panwar and Madhumathi ( n.d. ) took a sample of socially responsible equity common financess against indiscriminately selected conventional financess of similar net assets to look into differences in features of assets held, grade of portfolio variegation and variable effects of variegation on investing public presentation. The survey found that socially responsible financess do non differ significantly from conventional financess in footings of any of these properties. Furthermore, the consequence of variegation on investing public presentation is non different between the two groups.

Shah and Hijazi ( 2005 ) states that in a research conducted by Bauer, Koedijk, and Otten in 2002 utilizing an international database incorporating Sharia’h based common financess, remarked that the bing empirical grounds on US informations suggests that Islamic common financess lead to similar or somewhat less public presentation relation to comparable conventional portfolios.

Survey of the UK Islamic fund public presentation by Gregory, Matatko and Luther ( 1997 ) adopts a matched-pair attack and employs a size-adjusted step of public presentation. Their survey concluded that there is no important difference between the returns earned by the Islamic and Conventional fund and that both groups under-perform the FTSA benchmark index.

Elfakhani and Hassan ( 2005 ) notify that, Hamilton ( 1993 ) used the CAPM model to analyze the public presentation of 32 socially responsible common financess for the 10-year period get downing January 1981. He observed merely two important alphas out of the 32 ( one positive and one negative ) and came to the decision that the market did non monetary value socially responsible common financess reasonably and did non gain statistically important extra return and the public presentation of such common financess were non statistically different from the public presentation of conventional common financess.

They further apprise that, in the survey of Mallin, Saadouni and Briston ( 1995 ) , yielded the consequence that the returns earned by 29 UK Sharia’h based financess and 29 UK conventional financess, matched on the footing of age and size, between 1986- 1993 utilizing the Jensen, Sharpe and Treynor public presentation steps. A little bulk of financess from both groups under-perform the market as measured by the FTSA index. In add-on, Sharia’h based financess tend to surpass comparative to their matched conventional pairsl ; although this consequence is weak.

Writers further apprise that, Statman in twelvemonth of 2000 analyzed the Islamic common funds` public presentation with conventional fund ‘s public presentation and found that there was no major statistical difference in risk-adjusted returns of both the Islamic and conventional financess.

Hayat ( 2006 ) discussed that, the analyses done by Abdullah, Mohammed and Hassan in 2002 on 67 Malayan unit trust financess, including 14 Islamic and 53 Conventional Fundss utilizing multiple public presentation steps ( Sharp Ratio, the Modigliani Measure and the Information Ratio ) argued that, both Islamic and conventional financess somewhat underperformed against the benchmarked index KLCI ( Kuala Lumpur Composite Index ) . Consequences besides showed that returns of both financess were rather the same.

When Abdullah et Al. set hazard into history, Islamic Equity fund ( IEF ) performed good in bear markets and conventional financess performed good in bull markets. This consequence shows that investors have the option to exchange between these financess depending on the market conditions.

Hayat ( 2006 ) on his survey about the empirical appraisal of Islamic Equity Fund Returns, came to cognize that there was no important difference between the entire returns of conventional and Islamic benchmarks. He besides found that the Islamic Equity Funds had through empirical observation outperformed their Islamic every bit good as conventional benchmarks during 2002.

Statman and Glushkov ( 2008 ) signifier similar hypotheses like that of Hamilton and others` in the twelvemonth 1993. The writers investigate both the consequence of societal duty factors, such as community and employee dealingss, on returns and the consequence of eschewing stocks of companies associated with baccy, intoxicant, gaming, fire-arms, military and atomic operations. The writers find that investors inclined towards socially responsible companies gives investors a return advantage comparative to conventional investors. Furthermore, they find that eschewing the above mentioned companies ‘ leads to a return disadvantage for socially responsible investors. The writers conclude that that the return advantage and the return disadvantage largely offset each other. Harmonizing to the writers investors should follow the best-in-class attack in the building of their portfolios. This method leads to lean toward companies with high tonss on societal duty, but refrains from eschewing any company.

Bauer et Al. ( 2004 ) focused on public presentation and investing manner utilizing an international database incorporating 103 Islamic common financess – 32 from the UK, 16 from Germany and 55 from the US. Using a Carhart multifactor theoretical account to compare Shariah and conventional financess, they found no grounds of important differences in risk- adjusted public presentation.

They farther indicated that, Kreander et Al. ( 2005 ) matched 30 ethical financess based on fund size, age, state and investing existence, and used the hazard adjusted Sharpe, Treynor, and Jensen steps every bit good as a size adjusted two-index attack. The empirical findings show similar consequences to the old research. The findings suggest that there is non a important difference between ethical and conventional financess with the applied public presentation steps.