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 fund investment is a popular choice for many people who want to start investing but do not have much time or knowledge to manage investments directly.
In Indonesia, two types of mutual funds that are in great demand are conventional mutual funds and sharia mutual funds.
Although both provide opportunities for profit, they have very different principles and characteristics.
Conventional mutual funds focus solely on financial returns, while sharia mutual funds prioritize principles that are in accordance with Islamic teachings.
This article will discuss 10 key differences between the two types of investments, which can help you decide which option best suits your investment goals and principles.
1. Basic Principles of Management
The most fundamental difference between conventional and Sharia Mutual Funds lies in the basic principles of their management.
Conventional mutual funds prioritize achieving financial returns without paying attention to certain moral or ethical aspects.
In contrast, sharia mutual funds must comply with the principles of Islamic law which prohibit elements of usury, speculation and gambling.
Funds managed in sharia mutual funds may only be invested in instruments that comply with sharia provisions, such as shares of companies operating in the halal sector.
2. Investment Instruments Used
The instruments that can be used in conventional mutual funds are very flexible. Investment managers are free to choose investment instruments that can provide maximum profits, be it stocks, bonds or derivatives.
However, this instrument does not always pay attention to halal or haram factors according to religious teachings.
On the other hand, in sharia mutual funds, the instruments used must be chosen carefully and must comply with sharia provisions.
Shares of companies that invest in non-halal sectors such as gambling, alcohol, and products that are contrary to Islamic law are prohibited.
In addition to shares, other instruments such as sukuk (sharia bonds) and sharia money market instruments are also the main choices in sharia mutual funds.
3. Stock Selection Process
In conventional mutual funds, investment managers select stocks based on market analysis aimed at obtaining optimal profits.
Stock selection is carried out based on financial criteria without considering whether the shares come from companies operating in fields permitted or prohibited by religion.
On the other hand , in sharia mutual funds, the stocks selected must come from companies that run businesses in accordance with Islamic principles.
Therefore, stocks from companies engaged in fields that are contrary to sharia, such as cigarette products or alcoholic beverages, cannot be included in the investment portfolio.
4. Fees and Commissions
The cost and commission burden for conventional mutual funds tends to be lower compared to sharia mutual funds. This is due to the instrument selection process and stricter supervision in sharia mutual funds.
Sharia mutual funds require additional audits and halal certification to ensure that all selected instruments truly meet sharia standards, which of course will increase operational costs.
However, these additional costs are important to maintain the halal and integrity of the investment.
5. Profit Sharing vs Interest
One of the significant differences between conventional and sharia mutual funds lies in the way profits are distributed.
In conventional mutual funds, profits are usually distributed in the form of dividends or interest earned from investment results, but there is no restriction on whether the interest comes from halal or haram activities.
Islamic mutual funds, on the other hand, follow a fair and transparent profit-sharing system. All profits earned from investments will be shared based on sharia-compliant principles, without any usury elements.
Most of the profits from Islamic mutual funds come from profit sharing from sharia-compliant instruments, which ensures a fairer and more Islamic-compliant profit distribution.
6. Investment Risk and Returns
These two types of mutual funds have varying investment risks, depending on the instrument used. However, conventional mutual funds usually have a wider choice of riskier instruments, but can offer higher returns.
Sharia mutual funds, although limited to instruments that comply with Islamic principles, also have the potential for good returns.
However, since some instruments may be limited, the potential for short-term returns may be slightly lower compared to conventional mutual funds.
However, for many investors, sharia principles provide a sense of security and are more protected from unethical risks.
7. Supervision and Compliance with Sharia
Sharia mutual funds have a Sharia Supervisory Board (DPS) which is tasked with ensuring that all investment decisions and selected products comply with sharia provisions.
This DPS regularly verifies the entire investment portfolio to ensure that the funds managed do not involve activities that are forbidden in Islam.
Meanwhile, conventional mutual funds are only supervised by capital market regulators such as OJK, without special supervision related to religious principles.
Therefore, while conventional mutual funds are strictly regulated by financial institutions, sharia mutual funds have an additional level of oversight that prioritizes moral and religious principles.
8. Flexibility in Investment Options
Conventional mutual funds provide more flexibility for investment managers in choosing investment instruments.
Since there are no religious restrictions, investment managers can choose a variety of products, from stocks, bonds, to other derivative products to gain maximum profits.
On the other hand , Islamic mutual funds are more limited in terms of the instruments that can be used. Only stocks and financial products that meet Islamic criteria can be selected.
However, this limitation is actually an attraction for investors who want to ensure that their funds are used in accordance with moral and religious principles.
9. Fund Management
Fund management in conventional mutual funds is carried out based on business considerations and profit potential.
Investment managers will choose instruments that offer the greatest financial returns by considering market trends and risk analysis.
However, in the case of Islamic mutual funds, the funds managed must ensure that every investment decision follows the principle of fairness and does not contain elements of speculation, gambling, or usury.
This creates more ethical and transparent fund management .
10. Transparency and Oversight
Transparency in Islamic mutual funds is stricter compared to conventional mutual funds, especially related to fund management and instrument selection.
The Sharia Supervisory Board ensures that the managed funds do not involve companies or products that are contrary to sharia.
This transparency process provides a sense of security for investors who want to ensure that their investments are in accordance with religious principles.
In conventional mutual funds, even though there is supervision from institutions such as the OJK, transparency in terms of fund management and the instruments used is often more limited and does not prioritize moral and ethical principles.
Both conventional and sharia mutual funds have their own advantages and disadvantages, depending on your investment needs and goals.
Conventional mutual funds provide more flexibility in choosing investment instruments and focus on financial returns, while Mutual Fund Investment prioritize fund management in accordance with sharia principles and ensure that investments are made in an ethical manner and in accordance with Islamic law.
The best choice depends on your personal preference, whether you prioritize potential financial returns or ensure that your investments are in accordance with your moral and religious values.
