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Shari’a Compliant Equity Funds
Islamic Capital Partners, May 2008, Pages: 17
Investment companies are financial intermediaries that sell shares to the public and invest the proceeds in a diversified portfolio of securities. Each share sold represents a proportional interest in the portfolio of securities managed by the investment company on behalf of it’s shareholders. There are three types of investment companies: open-end funds, closed-end funds and unit trusts.
Open-end funds, also known as mutual funds, issue units which are redeemed by the company at a price which is the net asset value2. Closed-end funds issue units just like shares of any corporation trading on the stock exchange. A closed-end funds issues shares only once at the time of initial public offering unlike open-end funds where shares are issued continuously. Unit rusts are like closed-end funds, only they invest in bonds and do not actively trade instruments in their portfolios.
The advantage of investing in investment fund companies is that they offer economies of scale in investment management and transaction costs by spreading the costs of security evaluation over a large number of investors and by taking advantage of reduced rates on large-scale transactions. 3Investment fund management companies have proliferated in recent years and account for most of secondary market investments. There is a wide array of assets in which such companies invest, including equities, bonds, commodities and various hybrid and derivative products.
Islamic investment funds have emerged as a popular alternative for investments. The Islamic framework offers a range of options to a fund manager. The funds are organized as Mudarabas with the fund manager acting as the ‘Mudarib’ (agent), and the various subscribers as ‘Rab-almaal’ (financiers). The funds pooled together are then invested in specific types of activities or contracts, such as, equity, Ijarah, Murabaha, etc, which are disclosed to the investors. Islamic investment funds offer transparency not only in terms of contracts and products, but also for specific sectors (e.g. utilities, housing, metals, etc) and markets (e.g. domestic, international, etc). Islamic equity funds are the most popular form of Islamic investment funds.
Learning Outcome Statements
The candidate should be able to:
1 Understand the basic conditions for validity of Islamic investment funds
2 Comprehend the structure and different classifications of equity funds
3 Describe the procedure and guidelines for designing a Shari’a compliant equity fund highlighting the concepts of sector screening, income purification and financial screening
4 Appreciate the methodology of Dow Jones Islamic Market Index approach
5 Understand the various issues faced in managing Islamic funds especially Islamic equity funds
6 Understand how the ethical investment industry of the west is parallel to Islamic equity funds
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