An Empirical Study of Risk-Return Profile of Islamic Mutual Funds: A Case from Pakistan

Abstract

The remarkable growth of the Islamic mutual funds over the globe has increased demand among investors to include these funds in their portfolio of investments. With the emergence of Islamic Mutual Fund Muslim investors are increasingly shifting to Islamic Mutual Fund. Since 1990s equity investment the total wealth under the management of Islamic equity funds (excluding capital appreciation) has grown at an annual rate in excess of 15%.The growth of the Islamic funds operating in Pakistan is very rapid for example; Islamic Mutual Funds started in 1995 with Al Meezan Investment Management Limited introducing first Islamic Mutual Fund (Al Meezan Mutual Fund) as on July 13, 1995. The value of the total assets for the Islamic equity funds have risen from USD 800 million during the year 1996 to USD 3.6 Billion in just seven years period i.e. 2003. Hence, this research paper is an attempt to investigate risk and returns profile of these funds relative to the respective market Islamic and Conventional benchmarks using panel data analysis from July 2007 to June 2012. Consistent with previous studies conducted to analyze the performance of Islamic funds; on average the results indicate that there is statistically insignificant difference in return performance of the Islamic funds relative to the benchmarks. The result also reveals that there is a superior fund selectivity skill but inferior market timing expertise among the Islamic fund managers within the period of the study. On the contrary, results signify that the Islamic funds have been able minimize the risks as compared to the benchmarks and their returns performance is comparable to the market benchmark. Hence, the outcome of this study would benefit potential investor and market players towards participating in mutual fund industry, particularly in Malaysia. Additionally, the study will add knowledge on Islamic mutual fund’s performance in the finance literatures.

Keywords:Islamic Mutual Fund, Performance Evaluation, Panel Data.