Islamic Fund Management
32
Figure 2.8: Shariah Contractual Relationships in an Islamic Fund
Sources: Adapted from ISRA (2015), ISRA
Profit- and Loss-Sharing Mechanism of Islamic Funds
The profit- and loss-sharing mechanism features prominently in all Islamic fund management
products; the underlying concept is purely based on risk and reward. The risks taken should
commensurate with the returns gained and the losses suffered; the higher the risk, the higher
the return and loss and vice versa. As risks and rewards are interdependent, it is important to
be prudent when determining the investment strategies and asset allocations of Islamic funds.
The IMF’s study (2015, p. 97) on various types of conventional mutual funds shows that plain-
vanilla and ETF structures are less risky than hedge funds (which can incur high leverage costs
and adopt complex strategies with less disclosure requirements), as depicted i
Table 2.5: Characteristics and Risk Profiles of Major Categories of Investment Funds
Vehicle Publicly
Offered
Redemption
& Trading
Practice
Settlement
Method
Solvency
Risk
Leverage
via
Borrowings
Portfolio
Leverage
(Derivatives)
Investor
Base
Open-
Ended
Mutual
Fund
Yes End of day Cash Low Possible,
with cap
Yes, with cap Retail,
institutional
Close-
Ended
Mutual
Fund
Yes Not
applicable
(primary)
Intraday
(secondary)
Cash Low Some yes,
with cap
Yes, with cap Retail,
institutional
Money
Market
Fund
Yes End of day Cash Low Possible,
with cap
Yes, with cap Retail,
institutional