Halal mutual funds, or also known as Halal equity funds, and exchange traded funds (ETF) have a lot in common.
I’ve written about the list of Halal ETFs previously.
Both are types of funds which allows investors to diversify their investments and have exposure to different assets and/or companies in a single ticker.
By diversifying, this helps to reduce the overall risk.
But what is the difference between Mutual Funds and ETFs?
Aside from diversification, that’s where the similarities end.
The key difference lies in how the funds are managed.
On a day-to-day basis, the mutual fund manager will monitor the portfolio, implement their investment strategy, manage analysts, conduct research and execute the daily trading activities.
On the other hand, the ETF is passively managed, simply by mirroring a particular market index.
Hence if you’re investing into a mutual fund, you will be expecting to have a higher return and ‘beat the market’ because of the extra effort and time invested.
And because of these value-added services, investors have to pay more for mutual funds as compared to ETFs.
But wait... What does ‘beat the market’ means?
Imagine this - between 2 funds, Fund A and Fund B, and both bring an equal 10% return every year. However, Fund A is actively managed and Fund B is passively managed, which one do you prefer?
B of course.
Simple reason. Why would I want to put in an additional effort just to bring the same results? Human nature at its play. Least effort for maximum results.
Hence, your funds must be able to beat the 10% return every year to justify the extra efforts and to pay the additional service fee to the fund manager to help you to achieve it.
Secondly, ETFs can be traded like stocks i.e. buying directly from your brokerage or trading account, hence they are more liquid in the event you are urgently in need of cash.
Whereas for mutual funds, they also tend to have a lock-in period and a higher minimum investment amount that you need to commit to.
Unlike an ETF which you can buy anytime during trading hours, mutual funds can only be purchased at the end of each trading day and price is based on a calculated price.
Who is suitable for mutual funds?
Mutual funds may be more suitable for investors who fall under this group:
- You are new to investing, hence would like to do it passively.
- You need professional support doing financial due diligence on your behalf.
- You do not have time to manage your investments actively (study the company’s balance sheet, financial statements, earning reports etc).
- You would like to have the chance of ‘beating the market’ while doing it passively.
What is the difference between Halal Mutual Funds and the conventional one?
This lies in the selection of the companies that the mutual funds are invested in.
Theoretically, if the mutual fund is invested across 100 companies, all 100 companies must be Shariah-compliant.
For each one of the 100 companies, they must adhere to the Shariah compliant metrics, similar to how you do for the Shariah compliance screening of an individual company, which I've elaborated in my Tesla step-by-step example.
A single company that changes its status from Shariah-compliant to a non-one in their quarterly earnings report, will have to be replaced or removed as soon as possible, else the mutual fund will be considered non-permissible - strictly speaking.
Practically, this is hard to achieve if you're trying to do it yourself and screen one-by-one across that tens or hundreds of companies.
Hence there are 2 ways to go about doing this:
1. Go for the readily-made Shariah-compliant (halal) mutual funds out there. This approach is almost always much easier.
2. Go for mutual funds which are at least 95% Shariah-compliant from its allocation of basket of companies. But you will need to donate the remaining non-halal % away from your profits.
The Cost of Mutual Funds
In order to understand the costs of mutual funds, we have to look at the expense ratio, or the management fees.
These fees are charged annually, and they tend to cost a lot higher than the ETF to price in the extra work that the fund manager is “value-adding” (if their returns are much better that is).
Not only that, there are also other one-off fees involved such as:
- Subscription fees
- Redemption fees
- Switching fees
- Custodian fees
Pretty handful of costs, I must say.
List Of Mutual Funds
Here is the list of Shariah-compliant (Halal) mutual funds that I've managed to gather.
So what's our take?
Avoid it so long there are readily-available lower-costs ETFs, that targets the same segment.
Why is that so?
Undoubtedly, the costs of the halal mutual funds tend to be more expensive than an ETF and there is no guarantee that it will perform much better than an ETF.
Hence, the net returns tend to be lower than an ETF.
Nerdwallet reported that mutual funds may perform better than an ETF in the short-term, but it is the other way around for the long-term.
Reason being, having to consistently beat the market over and over again over an extended time is really hard.
Even one of the most popular fund managers of all-time, Warren Buffett, acknowledged this and went on to famously win a bet worth $1,000,000 against an active fund manager by earning more through a low-cost ETF mirroring S&P 500 over a 10-year period.
But there is a caveat too.
Depending on your strategy, you can still consider mutual funds.
For example, mutual funds might pay off more if you’re investing in a less efficient part of the market (such as emerging markets) where readily available information is scarce.
Having active management by fund managers may go a long way through deep research and a proven strategy.
However, if you’re looking at major markets like large-cap US stocks, it is considered an efficient market as information is easily accessed online, and investing through an ETF most likely be a wiser move.
There are also emerging markets out there which are hard to get direct access to like India and Korea for various reasons, such as restriction to local-only to be able to own local companies.
OK I’ve heard enough, I’m still buying. How can I buy it?
Not all brokerages offer mutual funds, hence you need to check with your brokerage first.
An alternative route will be going through your financial or wealth planner to help you with it.
Most times, they will have access to some of these funds which otherwise you may not be able to.
Now It’s Your Turn…
I’ve laid out the list of halal mutual funds to consider.
Now I want to turn it over to you.
Would you opt for mutual funds, and if you do, which one would you go for and why?
Also, if you have other shariah-compliant mutual funds which I might have missed out on, let me know in the comment section below.
Assalamualaikum, bro Khairul. Can you list halal mutual fund or investment which approved by CPF investment. Tqvm.