A comparative study of the performance of Pakistani Islamic income funds and conventional income funds

Abstract

Mutual Funds play a vital role in the development of both the developed as well as developing countries. It has the funds to support the objectivity of both the short term as well as long term investors. In the late 90’s, mutual fund industry evaluated a lot due to bullish trend followed by the Stock and the Bond market. Many new forms of the mutual funds were introduced and now the investor has vast majority of categories in which he or she can invest by comparing his own analysis of needs and demand with the cash out flow timing of the funds. Islamic mutual funds are the platform where investor invests to earn out a halal return on strict guidelines as prescribed by Islamic shariah. The return earned by the companies should not be on fixed bases with respect to face value but it should be on pro rata basis; where nothing is confirmed, neither on principal nor on return. Conventional Funds are allowed to organize their asset spectrum even if the respective company is involved in interest bearing liabilities and interest bearing income like the commercial banks and financial institutions. Mutual fund industry in Pakistan is growing at an immense rate due to which Total assets of mutual fund industry increased to Rs.332.883 Billion during the second quarter of financial year 2012-13. Pakistani mutual fund Industry’s total assets are increasing at a rate of 1.07% quarter after quarter. Open ended funds also increased by .60%. Closed ended Mutual funds are also increased by 4.35%. With the immense increase in the number of mutual funds in Pakistan, Investors seem difficult to differentiate which mode of investment is more economical and profitable i.e. either Islamic Funds or Conventional Funds. Present study addresses the question of whether the Islamic Income Funds out Perform the Conventional Income Funds on a Risk Adjusted bases. We have collected a three year data from 2010-2012 of Five Islamic and Five Conventional Income Funds of Pakistan and compare the performance by Using Sharpe Ratio, Information Ratio, Jensen Alpha, Tryenor Ratio and Net Selectivity. The result of these models concludes that Islamic Income Funds Outperforms the conventional Income Funds on a Risk Adjusted bases.