By Consumer Dummies

An Islamic unit trust or a mutual fund is a type of equity fund that collects funds from investors and pools them for investment in stocks, bonds, or other investment products. The return from the investment is paid back to the investors proportionately after deducting the cost related to the fund and the administration fee, or the fund’s portion of the profit (depending on the contract used). These funds are similar to their conventional counterparts but differ in their mode of financing and in the nature of their investments (which must, of course, be sharia-compliant).

Islamic unit trusts and mutual funds are managed per one of the following three Islamic contracts:

  • Mudaraba: Most of the funds work on a partnership basis. The fund manager is the working partner, and the investor is the silent partner. The fund profits are distributed among the partners, but only the investor loses the initial capital if the venture is unsuccessful. (The working partner loses any time and effort invested.)

  • Ijara: The fund management company purchases assets (such as real estate and vehicles) and leases them out to users. The company collects rent for each asset, pools it, and distributes it among the investors.

  • Murabaha: The fund management company uses investments to purchase assets. It then sells the assets on a cost-plus-profit basis, and the profits that it collects are pooled and distributed among the fund investors.

Currently, estimates indicate that more than 350 sharia-compliant investment funds — both unit trusts and mutual funds — are established globally.