Principles of Islamic Investment Funds

Principles of Islamic Investment Funds

Principles of Islamic Investment Funds:

Islamic Investment Funds are pool of funds wherein people invest their surplus money to earn halal profits in strict conformity of the Shariah principles. Two basic conditions must be fulfilled by the Investment funds:

  1. No Fixed Return: Islamic Investment Funds does not offer fixed returns to their investors. The subscribers of the funds must have clear understanding that the return they are expecting on their investment depends on the actual profit earned or loss suffered by the investment funds. Therefore, principal as well as a rate of profit cannot be guaranteed in case of Islamic Investment Funds.
  1. Funds must be invested in businesses acceptable to Shariah: Second, funds must be invested in a business that are not involved in activities prohibited by Shariah. It means that not only the conduits of investment, but also the terms and conditions agreed with them must follow the Islamic principles.
  1. Subscribers receive certificate representing their subscription and their share of profit: People who invest in in Islamic Investment Funds receive a certificate/a unit/ a share which certify their subscription and share of profit receive by the investors based on the percentage of amount invested by each investor. 
  1. Managers can share profit or charge fee for their services: Managers, managing the funds can be a bank, an individual with some credibility or group of people interested in investment. Managers usually have two options; either to partners in the profits or charge fee on monthly or annually basis for the services rendered to the subscribers.

In case of partnership, there will be a relationship of Mudarib and the capital provider and there will be agreed profit sharing ratio.

Islamic Investment Funds do not guarantee returns. Returns are tied up with actual profit earned or losses suffered by the investment funds.

  1. Management is liable to compensate the capital providers if loss occurs because of their negligence: If losses are result of management’s negligence, compensation will be provided to the investors by the bank management. If funds managers do not up-rate funds according to the terms and conditions stipulated in the prospectus or in case of misuse of funds, misconduct by the managers or frauds such losses will be recovered from the bank management. However, if losses are result of some natural reasons, then the capital providers will have to bear such losses.