Discussing Islamic fund management (with Mr. Iliyas Ismail)
Define Islamic fund management and the advantages of investing in a fund
Firstly, a normal fund management can be described as an investment activity that involves a group of investors investing in a fund and the fund is later invested in a diversified portfolio to achieve a set of financial goals. In order to make it an Islamic fund management, the contractual relationship between the investors and the fund management activities and the investments and any other related activities must comply with the rulings of sharia.
There are many advantages to engage in in a fund. Firstly, it creates diversification in your portfolio, where you can invest in a variety of assets which you would have otherwise found difficult to engage one by one to invest in, were you not involved in the pool of fund. Secondly, it has lower risks. The diversification allows for cushioning your fall if such an activity result in losses. The risk is spread across many investment funds that a loss in one could be cushioned by the others.
Thirdly, it is a type of liquid investment, easily sold at any day in the event that you are in need of cash. Fourthly, you would have professional management services of your investment at a lower cost. Other benefits would be ease of transaction (without the need for many book keeping and records) as this would be done mostly by the fund management and also the ability to achieve economies of scale from the high amount of cash pooled by a group of investors, which could translate into higher returns.
What is a private equity fund and what are the advantages of investing in such a fund?
Private equity (PE) involves investing in unlisted companies or turning public companies into private ones, creating a value in the enterprise through making improvements of the company. Advantages include higher returns compared to stocks, and the ability of the fund manager to access to information of the company. However, this would usually require high capital and rather less liquid due to its medium to long term period.
Can you explain the differences between Islamic and conventional mutual funds?
One of the main difference, is as mentioned, the need for Islamic mutual funds to invest in Sharia compliant securities and assets. This means, they cannot be invested in companies involved in activities such as gambling and liquor. This are the major examples non-sharia compliant activities.
Secondly, the former needs to have a Sharia adviser in its management board to consult on their activities. If there are any returns that seems to be received from haram activities from said investment, the money will need to be purified by setting aside the returns to charitable activities.
I've heard a person objecting to this practice by asking how could money received from haram investing be given to other people for good purposes. Firstly, we can't use the money, nor can we throw it away just like that, so giving them for beneficial purposes is the only way to make good of the returns. Secondly, the people receiving would benefit from it, and would be blameless from the source of the money as they are basically the recipient.
What are the sharia requirement for establishing Islamic funds?
You need to have a sharia supervisory board, a sharia screening, purification of the income earned and also giving the proceeds to zakat.
Outline and discuss the structure of Islamic fund management
Basically you will need to have the same structure as for a conventional fund management, with the addition of a sharia unit. This unit would have responsibility of ensuring the fund is properly managed with Sharia principles. They would give input on the constructing the fund structure and other administrative matters. They would also need to consult the appropriate regulators if there are any questions on the investment process or procedures, due to if there are any irregularities in terms of non conformance with sharia, the company would have to face a penalty.
Other tasks include administrative matters such as preparing reports of sharia compliance and others, including checking for any issues from reports by the compliance officer.
Other parties that need to be present are:
1) fund manager and administator
2) compliance officer
3) Distributor (sales team)
4) Legal unit
5) Accounting unit
6) Trustee (in certain countries this is left to the board of directors)
We move on to REITs, wheat is it and what are the advantages and disadvantages?
REITs stands for Real Estate Investment Trusts and is a trust fund for that invests in rental properties and the returns of rental income make up its profits. It gives many advantages such as lower capital start up requirement (as opposed to normal real estate investing), tax benefits, higher cash dividends, and as a benefit to investing in real estate, getting the benefit out of property appreciation.
The disadvantages is that they are more sensitive to demand from other higher yielding assets, which could lower their share price. Also, their dividends could be taxed as other income tax, which is higher than the normal tax 15% on most dividends.
Firstly, a normal fund management can be described as an investment activity that involves a group of investors investing in a fund and the fund is later invested in a diversified portfolio to achieve a set of financial goals. In order to make it an Islamic fund management, the contractual relationship between the investors and the fund management activities and the investments and any other related activities must comply with the rulings of sharia.
There are many advantages to engage in in a fund. Firstly, it creates diversification in your portfolio, where you can invest in a variety of assets which you would have otherwise found difficult to engage one by one to invest in, were you not involved in the pool of fund. Secondly, it has lower risks. The diversification allows for cushioning your fall if such an activity result in losses. The risk is spread across many investment funds that a loss in one could be cushioned by the others.
Thirdly, it is a type of liquid investment, easily sold at any day in the event that you are in need of cash. Fourthly, you would have professional management services of your investment at a lower cost. Other benefits would be ease of transaction (without the need for many book keeping and records) as this would be done mostly by the fund management and also the ability to achieve economies of scale from the high amount of cash pooled by a group of investors, which could translate into higher returns.
What is a private equity fund and what are the advantages of investing in such a fund?
Private equity (PE) involves investing in unlisted companies or turning public companies into private ones, creating a value in the enterprise through making improvements of the company. Advantages include higher returns compared to stocks, and the ability of the fund manager to access to information of the company. However, this would usually require high capital and rather less liquid due to its medium to long term period.
Can you explain the differences between Islamic and conventional mutual funds?
One of the main difference, is as mentioned, the need for Islamic mutual funds to invest in Sharia compliant securities and assets. This means, they cannot be invested in companies involved in activities such as gambling and liquor. This are the major examples non-sharia compliant activities.
Secondly, the former needs to have a Sharia adviser in its management board to consult on their activities. If there are any returns that seems to be received from haram activities from said investment, the money will need to be purified by setting aside the returns to charitable activities.
I've heard a person objecting to this practice by asking how could money received from haram investing be given to other people for good purposes. Firstly, we can't use the money, nor can we throw it away just like that, so giving them for beneficial purposes is the only way to make good of the returns. Secondly, the people receiving would benefit from it, and would be blameless from the source of the money as they are basically the recipient.
What are the sharia requirement for establishing Islamic funds?
You need to have a sharia supervisory board, a sharia screening, purification of the income earned and also giving the proceeds to zakat.
Outline and discuss the structure of Islamic fund management
Basically you will need to have the same structure as for a conventional fund management, with the addition of a sharia unit. This unit would have responsibility of ensuring the fund is properly managed with Sharia principles. They would give input on the constructing the fund structure and other administrative matters. They would also need to consult the appropriate regulators if there are any questions on the investment process or procedures, due to if there are any irregularities in terms of non conformance with sharia, the company would have to face a penalty.
Other tasks include administrative matters such as preparing reports of sharia compliance and others, including checking for any issues from reports by the compliance officer.
Other parties that need to be present are:
1) fund manager and administator
2) compliance officer
3) Distributor (sales team)
4) Legal unit
5) Accounting unit
6) Trustee (in certain countries this is left to the board of directors)
We move on to REITs, wheat is it and what are the advantages and disadvantages?
REITs stands for Real Estate Investment Trusts and is a trust fund for that invests in rental properties and the returns of rental income make up its profits. It gives many advantages such as lower capital start up requirement (as opposed to normal real estate investing), tax benefits, higher cash dividends, and as a benefit to investing in real estate, getting the benefit out of property appreciation.
The disadvantages is that they are more sensitive to demand from other higher yielding assets, which could lower their share price. Also, their dividends could be taxed as other income tax, which is higher than the normal tax 15% on most dividends.
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