Islamic Fund Management
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investments is divided by the number of units issued. The NAV of the fund then fluctuates as
the underlying assets trade daily and investors buy and sell the units of the fund. 1
Each share or unit in the fund represents an investor’s proportionate holding of the fund’s
portfolio, based on his/her share of capital contribution. The unit holder is equally entitled to a
proportionate share of the returns generated by the investment fund (net of the manager’s cut
and any other possible deductions). Returns are usually in the form of income distribution
(dividends) and/or capital appreciation, as the fund’s value grows with the good performance
of its underlying assets.
Most funds charge the following types of fees:
 A commission fee upon the purchase of units, known as a front-end load.
 A redemption fee upon the sale of units, known as a back-end load.
 An annual management fee.
Some funds also charge fees or penalties for early withdrawals.
provides the definition of an investment fund, as given by the Accounting and Auditing
Organisation for Islamic Financial Institutions (AAOIFI).
Box 2.1: Definition of Investment Fund by AAOIFI
Funds are investment vehicles, which are financially independent of the institutions that
established them. Funds take the form of equal participating shares/units, which represent the
shareholders’/unit holders’ share of the assets and entitlement to profits or losses. Because
funds are a form of collective investment that continues throughout their terms, the rights and
duties of participants are defined and restricted by the common interest since they relate to
third parties’ rights. As such, in cases where the fund is managed on the basis of agency, the
shareholders/unit holders will waive their right to management, redemption or liquidation,
except in accordance with the limitations and conditions set out in the statutes and by-laws.
Source: AAOIFI, Financial Accounting Standard No. 14, Investment Funds, Appendix B.
An investment fund usually falls under the umbrella term of collective investment scheme
(CIS). Depending on where the funds originated from and are domiciled, they can take the form
of unit trusts, investment trusts, mutual funds or other appellations. For instance, investment
funds in the United States (US) are generally known as mutual funds. Unit trust, on the other
hand, is a more common term in the United Kingdom (UK) but is also used in other countries
such as Malaysia, South Africa and Indonesia. A unit trust is a distinct vehicle that applies a
trust structure over the fund company’s structure. The trustee acts on behalf of its
beneficiaries, typically investors, and engages professional fund managers to manage the
investments of the beneficiaries. Besides investment in commercial papers, a unit trust can
also invest in other assets such as real estate.
Funds originated under the European Union (EU) legal framework are usually known as
Undertakings for Collective Investment in Transferable Securities (UCITS). While UCITS have
to comply with EU regulations, they are still subject to the regulations of the country where
1 The fund management process described here applies in general. ETFs, for instance, work
differently. NAVs for funds with non-listed assets will also work differently.