The Pros and Cons of the Islamic Equity Market - dummies

By Consumer Dummies

Equity markets (where stocks are traded) are crucial to any economy because they provide capital to companies. The Islamic equity market is where sharia-compliant stocks are traded.

Obviously, for a Muslim, the primary benefit of investing in Islamic equities is assurance that the funds are purchasing only sharia-compliant assets. But non-Muslim investors are also attracted to Islamic equities, so the benefits go beyond the religious. Here are some other advantages of investing in Islamic equity funds:

  • Transparency: Investors in Islamic equity funds expect a high level of transparency. After all, if one of a fund’s key objectives is to comply with sharia, the fund managers must be quite open about which industries and companies they invest in.

  • Financial screening: Part of the screening process for determining whether an equity asset is sharia-compliant involves considering a company’s financials, including how much debt the company carries. Islamic equity funds avoid investing in firms that carry very high levels of debt. Therefore, Islamic funds may be considered more conservative and slightly less risky than some conventional equity funds.

  • Diversification: Investing in any fund (Islamic or conventional) that purchases assets from multiple companies reduces the risk of losing capital when disaster strikes and a company declares bankruptcy or closes its doors.

  • Liquidity: For the Islamic investor, a benefit of investing in a fund versus putting money into a fixed-term investment is liquidity. When situations change and the investor wants or needs to cash out, doing so is much easier when the investment is in a fund. Keep in mind, however, that overall, Islamic investments, including Islamic funds, tend to be less liquid than their conventional counterparts.

The main drawback to investing in Islamic equities is the limited options. Whereas investors in conventional equities have so many choices that they can tailor a portfolio to meet any investment objective, investors in Islamic funds have significantly fewer funds to choose from.