Islamic funds are funds which comply with the Islamic investment principles (Shariah Principles) and accordingly are considered as acceptable Islamic investment products. Any investors, whether they are Muslims or non-Muslims, can invest in Islamic funds. Some investors may invest in Islamic funds for religious reasons and some may regard them as socially responsible products.


What are the key features of Islamic funds? Here are two key features:



Investments comply with Shariah Principles

Islamic funds can only make investments (e.g. equities) which are Shariah compliant.

The Shariah Principles generally preclude investments in businesses such as conventional financial services (i.e. banking, insurance, etc), alcohol, pork-related products, gambling (e.g. casinos), leisure and entertainment (e.g. hotels, cinemas and music industry), pornography, arms and defense-related equipment, tobacco, biotechnology companies involved in human/animal genetic engineering etc. Shariah Principles also preclude investments in companies with unacceptable levels of debt or interest income based on certain financial ratios.

Islamic funds generally will not use the following financing methods and financial instruments e.g. conventional fixed income instruments such as bonds, interest-based instruments or accounts, options, futures and other derivatives, short selling and borrowing on interest.

A fund's compliance with Shariah Principles is usually monitored by a Shariah compliance adviser appointed by the fund manager. Islamic funds generally are audited annually to ensure its investments are Shariah compliant.



Donation of interest and dividend income

To remain Shariah compliant, an Islamic fund is required to "purify" its portfolio of income that is considered "impure" by Shariah Principles, like any interest income embedded in Shariah compliant cash investments and dividend income from the prohibited business activities of investee companies received by the fund. The Shariah compliance adviser determines the amount which may have been derived from activities not in accordance with Shariah Principles and will donate such amount to charitable organizations as approved by the Shariah compliance adviser.


What should investors consider? In light of the special requirements under the Shariah Principles, investors should understand the investment objective, applicable investment guidelines/restrictions and the operations of an Islamic fund and refer to the offering documents before making investments.

In particular, investors should note the following:

• The potentially narrower investment universe due to the Shariah restrictions and the donations of interest and dividends received from "impure" underlying investments to charities may result in Islamic funds performing less well than funds with similar investment objectives which are not subject to Shariah Principles.
• Shariah is not a codified system and the principles thereunder are subject to interpretation, where there may not be consensus among different Shariah experts.
• Compliance with Shariah Principles is not a regulatory requirement. It is the sole responsibility of the fund manager to operate an Islamic fund in accordance with such principles.