Discover the various important differences between conventional and sharia mutual fund investments that can help you choose the right investment option according to your financial principles and goals.
Mutual funds are one of the most popular investment instruments in Indonesia, especially among novice investors.
There are two main types of mutual funds that are in high demand, namely conventional mutual funds and sharia mutual funds. Although both are investment options that can provide benefits, they have different basic principles.
Conventional mutual funds focus solely on financial benefits without considering ethical and normative aspects , while sharia mutual funds follow Islamic principles that require investment management in accordance with sharia law.
To help you understand more about these two types of mutual funds, here are 10 fundamental differences between conventional and sharia mutual fund investments that you need to know before making an investment decision.
1. Management Principles
The first and most fundamental difference between conventional and Sharia Mutual Funds lies in the management principles and legal basis used.
Conventional mutual funds are not bound by certain religious rules, meaning they can invest in any instrument that is considered to provide benefits, including those that contain speculative elements or investments in companies operating in sectors that do not comply with certain ethics or laws.
In contrast, Islamic mutual funds are governed by Islamic principles that require that managed funds should not be used to invest in companies engaged in fields that are prohibited in Islam, such as gambling, alcohol, or usury.
Therefore, Islamic mutual funds will only invest in instruments that are in accordance with Islamic law.
2. Investment Instruments
The instruments that can be included in an investment portfolio also differ. In conventional mutual funds, investment managers have the freedom to choose various instruments, including stocks, bonds, and derivative products, without considering whether the instruments comply with Islamic law or not.
Meanwhile, in sharia mutual funds, investment managers can only choose instruments that have been verified and certified halal, for example shares of companies that do not operate in sectors prohibited according to sharia, sharia bonds (sukuk), and sharia money market instruments.
This is done to ensure that investments do not violate sharia principles.
3. Stock Selection Process
In conventional mutual funds, investment managers are free to choose stocks based on criteria that prioritize the potential for financial gain alone.
In the stock selection process, companies that are considered to be able to provide the highest profit will be included in the portfolio, regardless of whether the stocks come from companies that operate in industries that are not in accordance with ethical or religious norms.
On the other hand, Islamic mutual funds will select stocks by considering the halal aspect. The stocks selected must come from companies operating in sectors that comply with Islamic principles, such as companies engaged in halal food, health products, and technology that do not conflict with Islamic teachings.
4. Fees and Commissions
The fees and commissions on these two types of mutual funds can also differ, although not always. Conventional mutual funds often have lower fees because there are no additional costs to ensure that investments are made in accordance with sharia principles.
In contrast, sharia mutual funds may have higher fees due to additional processes to verify that the selected instruments are in accordance with sharia provisions. These fees are usually used for audits and halal certification processes carried out by authorized institutions.
5. Income and Profit Sharing
In conventional mutual funds, profit sharing is more flexible. Investors will receive dividends or interest based on the profits generated by the investment that has been made.
However, in some cases, the dividends or interest received may contain elements of usury, which is contrary to Islamic principles.
Meanwhile, in sharia mutual funds, profit sharing is carried out based on the principle of fair and transparent profit sharing, in accordance with sharia principles.
In addition, Islamic mutual funds also require profit distribution that does not contain elements of usury or speculation, which provides benefits that are more in line with Islamic principles.
6. Risk and Return
In terms of risk, these two types of mutual funds have characteristics that are not much different. Both can offer varying rates of return depending on the instrument chosen and market conditions.
However, since Islamic mutual funds only invest funds in sharia-compliant instruments, there may be some more limited investment instruments, which may affect the potential for short-term returns.
However, many believe that by avoiding investing in companies involved in non-halal sectors, sharia mutual funds can offer protection from higher risks.
7. Compliance with Sharia
The existence of sharia supervision is the main characteristic that distinguishes sharia mutual funds from conventional mutual funds.
Sharia mutual funds must always be supervised by a sharia supervisory board which ensures that all investments made are in accordance with sharia principles.
This council is tasked with ensuring that all investment activities carried out do not involve elements that are prohibited in Islam, such as usury, maysir (gambling), or gharar (uncertainty).
On the other hand , conventional mutual funds do not have such supervision, and investment managers are responsible for ensuring compliance with applicable laws in the capital market, without regard to religious aspects or specific principles.
8. Flexibility in Investment Options
Conventional mutual funds offer greater flexibility in choosing various investment instruments, be it stocks, bonds, or derivatives, which can be adjusted to the desired investment strategy.
This allows investors to choose products with higher profit potential, although there may be greater risks. On the other hand, sharia mutual funds have limitations in choosing instruments that can only be selected from companies or products that are in accordance with sharia.
However, for investors who prioritize moral and religious principles in investing, this limitation is actually an attraction in itself, because they are sure that the funds they invest will not be used for purposes that are contrary to religious teachings.
9. Fund Management
Fund management in conventional mutual funds is carried out by investment managers based on the principles of capitalism that prioritize financial profit. In this case, investment managers can make decisions based on business calculations and higher profit potential.
fund management in sharia mutual funds must follow Islamic principles, where managed funds must be free from prohibited elements such as speculation and activities that harm other parties. This principle encourages more ethical and fair fund management.
10. Transparency and Oversight
Sharia mutual funds are generally more transparent regarding fund management , because every investment decision made must pass the approval and supervision of the Sharia Supervisory Board.
This board ensures that the selected products do not violate Islamic provisions and transparency is always maintained to provide security for investors.
On the other hand , although conventional mutual funds also have supervision, it is often more focused on compliance with capital market regulations and less consideration of ethical and moral principles, which is sometimes a concern for some investors.
Both conventional mutual funds and sharia mutual funds have their respective advantages and disadvantages.
Conventional mutual funds provide flexibility in choosing investment instruments and focus on financial returns, while Mutual Fund Investment prioritize investment management in accordance with sharia principles, avoiding risks that are not in accordance with Islamic teachings.
Choosing between the two depends on your investment goals and personal principles, whether you prioritize financial gain alone or also want to ensure that your investment is in accordance with moral and religious principles.