Islamic Fund Management
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3.1.3 Advantages and Disadvantages of Various Funds
With any type of investment, investors are exposed to risks and rewards. Having a clear
financing objective and awareness of the associated risks will help manage the expectations on
investment performance. A summary of the potential advantages and disadvantages of funds
by asset class is presented in Table 3.4 .
Table 3.4: Advantages and Disadvantages of Funds by Asset Class
Asset Class Advantages Disadvantages
Equities  Higher returns than fixed deposits and
other types of funds.
 Steady income.
 Capital appreciation.
 Portfolio diversification.
 Funds are professionally managed, with
access to better information compared
to average investors.
 Minimum entry cost for investment.
 Exposed to upfront and recurring
transaction costs that will have an
impact on returns.
 Unpredictability - cyclical market
conditions may not suit risk-averse
investors.
 Medium-to-long-term investment
horizon.
Fixed-
Income
Securities
 Portfolio diversification.
 Suitable for low-to-medium-risk
investors.
 Steady income.
 Funds are professionally managed.
 Minimum entry cost for investment.
 Exposed to upfront and recurring
transaction costs that will have an
impact on returns.
 Less exposure to market volatility
compared to equity-based funds.
However, investors are still exposed to
market cycles.
ETFs  Offer investors more diversified
exposure than investment in individual
stocks/forex/commodities.
 Entry cost is lower compared to direct
investments, e.g. gold.
 Lower annual management fees
compared to unit trust funds.
 Transparency – investors know exactly
which assets are held in the ETF.
 Since ETFs are traded like stocks,
investors have easy access to liquidity.
 Funds are professionally managed.
 Limited number of ETFs to choose from
in the market compared to unit trust
funds.
 Intraday price swings may make short-
term investors jittery.
 Costs could be higher than trading in
stocks, which attract no management
fees.
REITs  Portfolio diversification.
 Potentially higher returns in return for
medium-level risk.
 Income is secured by long-term leases.
 Properties are professionally managed.
 Potentially slower growth since only
10% is allowed to be reinvested.
 Exposed to potentially high leverage
ratios.
 Higher tax rate on dividends.
 Need to operate in a REIT-compliant
manner.
 Sensitive to other higher-yielding
investments.
Sources: Sharmila (2014), RAM