KUALA LUMPUR, Sept 3 — Shariah-compliant income funds have seen increasing popularity lately, reflecting a growing interest in religiously aligned investment options in many parts of the world, including Malaysia.

The growing demand for such trust funds can be attributed to various factors such as the growing Muslim population, the globalisation of Islamic finance and the diversity of investment offerings by banks and financial institutions.

However, these funds are not only for Muslims as anyone can invest in them.

But what exactly are Shariah-compliant income funds?

Simply put, Shariah-compliant income funds are investment vehicles designed to generate income while adhering to Islamic principles.

The adherence to such principles comes with many requirements.

Unlike conventional trust funds, Shariah-compliant funds prevent the financial institution from deriving income from the sale of non-halal products and activities such as alcohol, pork, gambling and adult entertainment.

The fund also prohibits certain income-generative vehicles including conventional bonds, interest-bearing instruments (riba') and engaging in excessive uncertainty or speculation (gharar) due to their incompatibility with Islamic principles.

How do Shariah-compliant funds generate income?

These funds generate income through various methods but most commonly through profit-sharing arrangements, such as mudarabah, known as a partnership where one party provides capital and the other provides expertise or musharakah which is a joint venture where all parties share profits and losses.

Other methods include asset-backed investments like sukuk, leasing agreements, direct real estate investments and investing in companies whose activities and financial practices comply with Shariah principles.

Are there risks and limitations?

Similar to other investment schemes, Shariah-compliant income funds are not immune from potential risks such as:

1. Limited investment choices: The broad restrictions to Shariah-compliant investments may potentially limit the fund’s choices that in turn might affect diversification and return on investment.

2. Market risk: As with any investment scheme, Shariah-compliant funds are subject to market volatility and changes that may impact returns.

3. Liquidity risks: Some asset-based Shariah-compliant investments like real estate might be less liquid, making it more difficult to sell quickly in case of any economic downturn or financial crisis.

4. Income purification: Income generated by a Shariah-compliant fund must still be purified as it is often unavoidable that some of the income generated through other investment vehicles might include some form of non-halal income such as interest.

Therefore, Muslims who invest in Shariah-compliant funds are required to contribute 2.5 per cent of their income as zakat if the investment value is equal to or greater than the nisab value.

In Shariah, nisab is the minimum amount of wealth that a Muslim must have before being obliged to contribute zakat.

What’s the return like?

Shariah-compliant trust funds typically offer returns ranging from 3 to over 10 per cent per annum, depending on the type of fund and investment strategy.

Fixed income and sukuk funds tend to have lower but more stable returns, while equity and mixed funds may offer potentially higher returns with greater variability.

Who are the Shariah-compliant trust fund players in Malaysia?

In Malaysia, numerous established banks and financial institutions offer Shariah-compliant funds alongside their conventional options.

From Tabung Haji to a long list of private fund management companies such as Public Mutual Berhad, CIMB Principal Asset Management and Maybank Asset Management have jumped on the bandwagon to offer Shariah-compliant investments.

With the growing Shariah-compliant trust schemes, AmanahRaya Investment Management Sdn Bhd added a new unit trust fund called AmanahRaya Mixed Asset Syariah Conservative Income Fund in August to widen its offerings and cater to Muslim investors.

As the name dictates, the fund is asset-based which means 60 to 75 per cent of its net asset value will be sukuk while 35 per cent will be Shariah-compliant equities and securities.

As with any other investment, this strategy is prone to various risks such as market conditions, inflation, loan financing, interest rate volatility and liquidity.