Are Islamic Mutual Funds Performing Better Than Conventional Funds? An Empirical Investigation

Abstract

Islamic or Shariah compliant mutual fund possesses different attributes as compared to Conventional or Traditional funds as Shariah based funds must follow the Islamic rules or Shariah screening process. The current research examines the comparative analysis on the performance of Shariah based funds and the traditional funds in Pakistan. For the comparative analysis, this study collected the sample of 60 funds containing 30 Shariah based and 30 General mutual funds for the period of 8 years from 2011 to 2018. The current research selects five performance measure to assess the performance of the mutual funds including Sharpe ratio, Treynor Ratio, Sortino’s Ratio, Information Ratio and Jensen’s Alpha. The findings indicate that the performance of the Shariah based funds is better as compared to its traditional counterparts as the results of all four ratios (Sharpe, Treynor, Sortino’s and Information ratio) of Shariah based mutual fund is higher than the traditional funds. On the other hand, the Jensen’s ratio results show better performance of traditional funds as compared to its Islamic counterparts. This study concluded that the performance of Shariah based funds is better than its General counterparts in Pakistani capital market for the selected period. This study suggested that conventional fund holders should consider Shariah based funds in their portfolio because Islamic mutual fund provide hedging against risk as these funds are in compliance with Shariah screening process. This research also suggested that fund managers to educate the investors and take effective actions to strengthen the capital sector of the market in Pakistan