Mutual fund or Unit Trust Fund in Malaysia is a financial instrument created by the Asset management companies which are specialised in pool saving from both retail and institutional investor e.g. Bank, big retail chains. Liquidity, portfolio diversification and investment expertise are very important for individual investor and that is why we can see that there is increase in choosing unit trust funds as their investment. Although all these investor are different from each other based on their preference , risk taking abilities and compliance with their religion requirement and the liquidity need etc.
In the past decade we can clearly see that Malaysia has welcome Islamic banking and Trading activities and it is growing at a very fast pace and has played a important role in the support of countries various needs and demands. As we know that the market functioned based on interest and interest rate, therefore it is very clear it is a hurdle for Muslim investor to invest their investment in such a market as interest is strictly prohibited in Islam and 50 % of the investment in the country is hold by the Muslims. It is difficult for them to invest in non Shariah compliance product and businesses. The increasing demand alternative to the interest base market which is Shariah Compliant has prompted the Malaysian Government to take various measures and step in order to introduce interest free market which is Shariah Compliant so that it can attract the investor who were not investing their investment due to Shariah Compliance issues. E.g. Islamic Bank was established in 1980 and the Kuala Lumpur Shariah Index was introduced in 1999 with the view of meeting the requirement by the Muslim investor.
Based on the Islamic Finance system any transaction that occurs in the market should be interest (Riba) free, Gambling (maisir) and ambiguity (Gharar). Islamic investment can be described as investment in financial services or any other investment activity which comply with the principle established by the Shariah. These principles require every investment to comply with below two conditions.
Investment must be made in ethical sectors. In other words, profits cannot be generated from prohibited activities such as alcohol production( for drinking purpose), gambling, pornography etc. In addition, investing in interest (riba)-based financial institutions are not allowed.
All wealth creation should result from a partnership between an investor and the user of capital in which rewards and risk are shared. Returns in invested capital should be earned rather than be pre-determined.
Before the financial crisis in 1997, Malaysia economy had reported high growth for the decade, average at 8.5% per year. Due to high GDP growth rate and investment inflow of foreign capital cyclical sectors such as property, banking sector and entertainment sectors had also reported high performance for the decade in the Stock market. Conventional funds do not have investment restriction so they incorporate theses high performance stock into their investment portfolio during good economic period, similarly during the financial Crisis in 1997 stocks in the cyclical sector reported the worst performance. This is the reflection of poor performance of conventional unit trust funds. As we know that Islamic funds have limited investment choices due to the Shariah compliant issues and Interest prohibition, therefore Islamic funds were not affected by the cyclical effect of the economy.
Conventional funds only have follow and comply with the Capital Market Law, however on the other hand Islamic Funds have to comply with both Capital market law and Quranic law of economics. The aim of the article is to provide a basic understanding on the performance of these two different unit trust funds in the Malaysia Capital Market. Islamic unit funds are fairly new in the market as compare to the conventional funds. So far there is not much information available on the performance comparisons of both Conventional and Islamic Unit funds. It is clear from the comparisons of Conventional funds government and non government versus Islamic fund government and non government using available tools and information over the three different stages of economic periods namely during, pre and post economic crisis. The result of the analysis has indicated that the performance of both funds is below the performance of the market. However comparative measure of variability suggested that Islamic funds are less risky than the Conventional funds. Both conventional unit funds and Islamic unit funds have diversification levels which are below the 50% of the market portfolio diversification level. The study also indicated that the Islamic unit funds perform better than conventional unit funds during the crisis period. However before the crisis period the conventional unit funds performed better than Islamic Unit fund. The study also indicated that the Islamic Unit funds are better instruments used as hedging instrument. The conclusions of the study could have important implication for regulatory agencies and investor of the unit trust industry. Conventional funds performed better than the Islamic unit funds during the good economic and perform worst as compare to Islamic unit funds in the crisis condition of the market. The analysis provides a good indication and justification for the market regulators of ICM in Malaysia to further enhance the ICM in Malaysia.
