Background On The Mutual Fund Industry Finance Essay

This chapter gives a general background and overview of common fund industry. We will get down our chapter with define the common financess and take an overview about advantages of common financess. History and tendencies of common financess, types of common financess besides are some points that discovered on this chapter. After the overview of common financess, the chapter will depict the Islamic finance as general and its constituent which are Islamic banking, Islamic insurance and Islamic common financess. At the terminal of this chapter we will give some information about Islamic common financess industry.

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2.2 Definition

The common fund is knows as a type of corporate investing strategy ( CIS ) which managed professionally by investing house. It pools the money from stockholders and invests it in short-run money markets instruments, bonds, stocks and other securities ( Alkassim 2009 ) , the investing aims are differ from fund to another, some of financess puting more forcefully and others puting more discreet. ( USAA 2010 )

2.3 Advantage of Common Fundss

Common financess became one of the most of import investing vehicles for investors since its creative activity. There are many grounds that led common financess to supply large benefits to investors even the investor, who has a limited cognition.

2.3.1 Diversification

Diversification is one of the of import regulations for investors. It helps the investor to cut down the hazard of his portfolio, this happen by purchasing securities with different capitalisation from different industries and bonds with changing adulthoods from different issuers. This will be really dearly-won for single investor, but if the investor purchases a common fund, he is provided with great benefits of instant variegation and plus allotment without spend a big sum of money which needed to make single portfolio ( Obaidullah 2005, p.204 ) .

2.3.2 Economies Scale

Economies graduated table is the other advantage that provided by common financess to cut down the cost of dealing for the investor. The easiest manner to understanding economic systems graduated table is that if there is an investor who needs to buy one of any point, and there is another investor demand to buy 10 points from the same point that purchased by the first investor, here the value of the point in the 2nd state of affairs is less than the first 1. Common financess are able to cut down minutess fees. Here, investor can do minutess on a much larger graduated table for less money.

2.3.3 Valuable Information and Professional Knowledge

Common financess provides to the investor valuable information and professional cognition with low costs, investing information roll uping demands to clip and this procedure may be excessively dearly-won. Furthermore, the pick of investor may depends on financess director determination, because fund director purchase and sell depending on market conditions and trading accomplishments ( alkassim 2009 )

2.3.4 Divisibility

Common fund helps investor to put in minimal sum of money, so investor can buy common financess in smaller denominations, which it help investor to put in common financess even if he do n’t hold adequate money at clip by spliting the monetary value into monthly payments ( Investopedia ) .

2.3.5 Liquid

Stability in monetary values is really of import affair for investors. In common financess the difference between the current market value and the sale monetary value is little. The cost of dealing in common financess is little, because the dealing fees calculated one time in the twenty-four hours after the fund ‘s net plus value ( NAV ) .

2.3.6 Professional Management

Common fund director has a good experience to do a good investing determination. So when the investor buys a common fund, he is taking an experient fund director. This director will set the money in stocks that has carefully studied. Besides, the trough will give a professional survey for the investor to make up one’s mind before purchasing or selling a common fund.

As we saw above common financess gives investors many advantages, some of these advantages helps investor to put in valuable stocks to make good net incomes and cut down the hazard to minimum degree. And other advantages help investor to take a good investing determination harmonizing to advices from professional fund directors. Finally the low dealing cost is besides an advantage of common fund.

2.4 History and Current Trend in the Mutual fund industry

For about a century there were investing trusts in Holland. In 1774, Abraham van Ketwich a Dutch merchandiser has invited many investors to subscribe to swear which had called Eendragt Maakt Magt, which founded after the fiscal crises of 1772-1773, the chief purpose of this trust to give little investors with limited income a opportunity to diversify. ( Rouwenhorst K. 2004 )

The first common fund founded in 1868 in London, by the initiation of the Foreign and Colonial Government Trust. Mutual financess had found a good a positive environment by the British Torahs, 18 common financess have appeared in 1875 more than A?6.5 million. The first fund on US was established in 1889 by the Boston Personal Property, it called the New York Stock Trust, and it was closed-fund ( Bogle 2005, p 14 ) . In 1929 there was a large clang “ Black Thursday ” happened in U.S. and it has affected on the market. The figure of closed-ended common financess was 89 common financess. The market capitalisation of these financess was $ 3 billion ( Baumol et al 1990 ) . On the other manus, open-ended common financess were a few compared with closed-ended common financess ; there were approximately 19 financess with $ 140 million. Massachusetts Investment Trust ( MIT ) was the one of largest open-ended common financess in 1924, with the value of $ 392 Thousands. There are two scenarios have happened in the period after “ Black Thursday ” clang in 1929 which are, in 1933 there is an Act known as the Acts of Securities was passed by the Congress to register all listed companies. Besides there was another Acts which passed in 1934, that called Security Exchange Commission ( SEC ) , which transmission the SEC to command and administrate all fiscal activities of the market ( Bogle 2005, p. 19 ) . During the period between 1940 and 1980, there were a growing but it was traveling slow ( Investment Company Institute 2007 ) , open-ended financess have become the of import common financess theoretical account for investing organisations.

In Britain, and during the period from 1920s to 1950s, there rating of common financess sector was comparative to statute law that restricted arrangement any new common financess in 1930s, but there were approximately 98 financess which managed by 15 pull offing houses operators, the assets of these financess is about $ 83 million ( Berent 1995, p.17 ) . The figure of common financess was 150 common financess with assets in 1967, and the value of assets for these financess was about $ 835 million, that means there was a growing in the common fund industry ( Berent 1995, p.23 ) . There was a autumn in common fund industry which happened in 1974 due to the “ oil daze ” . Inflation of 27 % which happened in 1975 besides had affect in common fund industry ( Financial Service Authority, 2007 ) . The growing in British common financess has continued during the period from 1980s to 1990s. In January 1994, the value of the common fund industry increased to make A?99.9 billion after it was A?36 billion in 1987 ( Berent 1995, p.30 ) . Between 1980s and 1990s there were developing in planetary fiscal system such as India, Middle East, China and South America ( Goetzmann et al 2004 ) . In recent old ages, the industry of common fund has developed quickly. The common fund industry in US in 2007 represented about 50 % of all planetary common fund industry and the assets value of it estimated by about $ 10 trillion ( ICI 2007 ) .

2.5 Types of Mutual Fundss

There are many types of common financess each type differ from another on its characteristics harmonizing to hazard and return relationships. Common financess may incorporate of with limitless Numberss of portions, here it called open-ended, and it may incorporate from a fixed Numberss of portions, so it called closed-ended. In this subdivision we will supply an overview about the most common types of common financess.

2.5.1 Money Market Fundss

Money market fund is an of import type of financess which predictable to account approximately 30 % of the Mutual fund industry ( ICI 2007 ) . Besides, it is safest one, because it invests in low hazard investings. The money which used to put on this type of common financess will go less valuable. And it will lose its purchasing power, because this type of common fund invests in low return investings. Treasury bills and Certificate of Deposit ( Cadmium ) are some of these financess. Reduce the hazard come from stableness of net plus value monetary values. Investment returns of money market fund reflect the involvement rate, but the rising prices reduces it. The chief advantage of money market fund is the liquidness, because you can turn your portions to many by selling it at any clip. Therefore, a money market fund often provides east liquidness and besides provides smooth net incomes for a long-run period ( Alkassim 2009 ) .

Figure 2.1: Types of Mutual Fundss

Beginning: Kunvarji, hypertext transfer protocol: //kunvarji.com/types_mutual_funds.html

2.5.2 Equity Fundss

Equity financess is a most common financess, it invests in stocks. This type of financess is high risky, besides it invests in long-terms investings. There are many types of equity financess harmonizing to the distinction in equities. Categorization of this fund is based on two factors. First, the size of the companies and the 2nd 1 is the investing manner. Some financess invest in small-caps stocks, others in mid-caps stocks and last invest in high-caps stocks, where the size of investing for small-caps stocks is less than $ 500 million, mid-caps stocks is between $ 500 million and $ 5 billion, and big-caps stocks is big than $ 5 billion. There are three investing manners value, blend and growing. The term value references an attack of puting which seeking for high quality houses which are beyond favour with the market. Growth is the antonym of value, which refers here to companies that have a high growing in returns. A blend is companies between value and growing. So the following figure may give an thought about categorizations of equity financess.

Fig 2.2: Categorizations of equity financess

Beginning: hypertext transfer protocol: //www.investopedia.com/university/mutualfunds/mutualfunds1.asp

2.5.3 Index Fundss

Index fund is a fund which matches its portfolio to a specific major index such as FTSE 100, BSE sensitive index, Standards and Poor ‘s ( S & A ; P ) 500, etc, with the purpose of following the public presentation of market in which it invests. A inactive investing procedure means the procedure of puting in an index fund. The want is to acquire a beta returns for investors. On the contrary, to accomplishing high returns, active fund direction involves changing the allotment of a fund ( Gruber 1996 ) . Index fund has a low trading costs compared with the other types of financess, because minutess are limited ( Alkassim 2009 ) .

2.5.4 Exchange aa‚¬ ” Traded Funds ( ETF ‘s )

Exchange-traded fund ( ETF ) or exchange-traded merchandise ( ETP ) is an investing fund which traded on stock exchanges. It is trade like stock. There is a restriction in traditional common financess, when the market near at the terminal of twenty-four hours they calculate net plus value NAV, but exchange-traded financess does n’t hold NAV, so it does n’t necessitate deliberate every twenty-four hours. In 1993 Exchange Traded Fund ( ETF ) which is tied to the S & A ; P 500 was created to work out the restriction of the American Stock Exchange ( AMEX ) ( Reilly and Brown 2003, p.87 ) . ETFs normally provide the revenue enhancement competency of index financess, easy variegation and low cost proportions.

2.5.5 Fund of Fundss

It is obvious from the name of this fund ( Fund of Funds ) ( FOF ) , that it invests on other financess instead than puting straight in stocks and bonds, so it help investors to accomplish variegation and plus allotment by puting in a large scope of others common financess and set it in one fund. One of this fund advantages is that it has low hazard compared with other types because it provides greater variegations. Fees of direction in fund of financess are lesser than the fees of direction of an original fund. Appraisal of a fund of financess is derived from the mixture of the underlying fund disbursal and all fund of fund degree disbursal as together diminish the net incomes on the overall investing ( Euromoney 2006 ) .

2.5.6 Hedge Fundss

Winslow Jones has played an of import function to set the first hedge fund thought in 1949. This happened when he was fixing a paper about the latest methods used in the analysis of the public presentation of fiscal markets and predictable environment for Fortune magazine ( Nassir L. 2008 ) . The chief ground for this name that these financess adopt investing scheme designed to fudge or guard against hazards of exposure to any losingss. Hedge fund is an investing pool that includes a figure of investors which non more than approximately five 100 investor. The value of puting in the fund is high compared with the value of puting in other type of financess, It range at lower limit normally between half a million and one million dollars. Doctrine of the Fund is to guarantee a net income to the investor, irrespective of the volatility of universe markets. There are no limitations on the fund director of the organisers. The figure of these financess is about 8000 Fundss around the universe markets ( Fawi M. 2008 ) . However, the repute of these financess is non good. A batch of people faulting these financess, and sing it is lending on many fiscal crises such as the prostration of the lb sterling in 1992, in add-on to other charges such as manipulate the monetary values of strategic trade goods such as oil ( Derwish G. 2008 ) .

2.5.7 Chemical bond Fundss

Chemical bond financess invest in the fixed-income investings. It is likely to pay returns higher than return of money markets financess. There are many types of bond financess harmonizing to the types of investing, such as mortgage-back securities, corporate bonds, Treasury bonds, etc. Harmonizing to these different types of bond financess the recognition hazard of bond will be different from really safe to really high. Besides, there is a distinction in the footings of bond financess between short-run and long-run up to 30 old ages adulthood ( Bodie et al 2005, p. 113 ) .

2.5.8 Real Estate Investment Trust Fundss

Real estate investing trust financess ( REITs ) is an investing financess that usually established by fiscal companies such as insurance companies, Bankss or mortgage companies ( Kuhn 1996 ) . REITs have two types the first 1 that invest in commercial concerns for illustration offices edifices, shopping centres, hotels, etc. The 2nd type which invests straight in existent estate ( Hardy 1995 ) .

2.6 Islamic Finance

Last recent old ages has seen rapid growing in Islamic finance industry, besides there are many inventions in Islamic finance merchandises have appeared. There are three chief parts of Islamic finance Islamic insurance ( Takaful ) , Islamic banking and Islamic common financess. There are some regulations manage the Islamic fiscal system, these regulations are based on the Islamic jurisprudence ( Sharia ) . ( Gait and Worthington 2007 ) .

2.6.1 Islamic Finance Rules and Principles

The chief Islamic jurisprudence ( Sharia ) resources are Quraan and Prophet Mohammed ‘s stating ( Sunna ) . Prohibition of Riba ( involvement ) , Mayser ( Gambling ) and Garar ( Uncertainty, trade in hazard ) are the most of import characteristics of Islamic finance. Harmonizing to Sharia, Riba is an add-on to the rule. Payment for utilizing money, that is set in progress, is besides considered as Riba and hence prohibited ( Dar and Presley 2000 ) .

Harmonizing to Siddiqi ( 2004 ) there are five grounds to for forbiding Riba which are Corrupts Society, Getting returns without work depending on other ‘s attempts, finally effects in negative growing, degrades and lessens human personality and is unfair.

Gharar means that purchasing trade goods of which it does n’t has a specific value beforehand, it is prohibited by Sharia. Maysir means gaming and it prohibited by Quran besides ( verses 2:219, 5:90, 5:91 ) , because it depends on guess to do money which it is type of chancing. The ban of Maysir and Gharar will impact on Muslim investors for a longtime, as it means that they are barred from puting in options, future and any guess rooted in involvement. This may curtail on many fiscal merchandises which consist of a mixture of existent assets and derived functions.

2.6.2 Islamic Banking

Bank is a fiscal medium between stockholders and borrowers which lend the money that collected from stockholders to borrowers. There are some involvement paid by borrowers and some involvement paid for depositors, the difference between these involvements is the bank gross. So, bank net incomes is normally ensuing from involvement grosss after deducted and disbursals ( Boos 2007 ) .

Islamic banking system and conventional banking system are similar to each other, but the chief difference between them, Islamic banking plants due to Sharia. So, involvement is prohibited in Islamic banking system. Net income and loss sharing ( PLS ) is the chief construct that used by Islamic banking to pull off the minutess between the bank and borrowers ( Khan and Mirakhor 1987 ) . Muslim Bankss mix the commercial banking operations and investings to keep net incomes, and to give depositors a good adequate rate of returns. As good, there is another different between Islamic bank system and conventional bank system, in Islamic bank money used as trade good which is sold and bought for trading intent and to merchandise in Halal merchandises ( non prohibited merchandises ) . In general, in the last 30 old ages the Islamic banking industry has been existence. The Numberss of Islamic Bankss is increasing and there are now more than 300 Muslim Bankss, the assets of it are more than $ 300 billion ( Iqbal and Molyneux 2005, p.158 ) . There are yearly turning in Islamic Bankss about 10-20 % ( McKinsey 2005 ) .

Table 2.1: Sample of Established Islamic Banks

Name

State

Date of Establishment

Nasser Social Bank

United arab republic

1971

Islamic Development Bank

Saudi Arabia

1975

Dubai Islamic Bank

United Arab Emirates

1975

Faisal Islamic Bank of Egypt

United arab republic

1977

Faisal Islamic Bank of Sudan

Soudan

1977

Kuwait Finance House

Kuwait

1977

Islamic Banking System International Retentions

Luxemburg

1978

Jordan Islamic Bank

Jordan

1978

Bahrain Islamic Bank

Bahrein

1978

Dar Al-Mal Al-Islami

Switzerland

1981

Bank Islam Malaysia Bhd

Malaya

1983

Beginning: International Organisation of Securities Commissions ( 2004 ) , p.19

2.6.3 Islamic Insurance

Muslim insurance ( Takaful ) is an Islamic thought which is beached in Islamic Muamalat ( minutess of banking systems ) harmonizing to Sharia. For over 1400 old ages, this construct has been experienced in a assortment of signifiers. There are many differences between Takaful and conventional insurance which are ; First, conventional insurance generate net incomes depending on concern which owned by stockholders but Takaful depends on shared hazard which owned by the policyholder. Second, there are two beginnings of income for conventional insurance which are invest income and underwriting excess, whereas the Takaful is a non-profits operate and it footing to help the policyholder at an happening of an event. Third, the excess or extra belongs to stockholders in a conventional insurance but it belongs to the policyholders in Takaful ( Obaidullah 2005, p.124 ) .

From 1973, Muslims began a re-detection of the Takaful signifiers. In fast sequence, there are many attempts to present Takaful alternate to conventional insurance in many states. Table 2.2, shows some established Islamic Takaful constitutions.

Table 2.2: Sample of Established Islamic Takaful Constitutions

Date of Establishment

State

Name

1968

Soudan

General United Insurance Co.

1973

Soudan

National Reinsurance Company of Sudan

1979

Soudan

The Islamic Insurance Company

1979

Saudi Arabia

The Islamic Arab Insurance Company

1980

UAE

The Islamic Arab Insurance Company ( Dallah )

1981

Switzerland

and UK ( 1982 ) Dar Al Mal Al Islami

1983

Bahrein

Bahrain Islamic Insurance Company { recapitalized and renamed Takaful International in 1999 }

1983

Bahama islandss

Saudi Islamic Takaful and Retakaful Company

1983

Luxemburg

Islamic Takaful Company

1984

Soudan

Al Barakah Insurance company

1983

Saudi Arabia

Takaful Islamic Insurance Co. / Bahrain

1985

Bahrain and Saudi Arabia

Islamic Insurance and Reinsurance Company

1984

Malaya

Sayrikat Takaful Malaysia

1986

Saudi Arabia

National Company for Cooperative Insurance

1992

Saudi Arabia

Al Rajhi Islamic Company for Cooperative Insurance

1992

Bahrein

Al -Salam Islamic Takaful Co.

1993

Brunei

Takaful IBB Berhad

1993

Brunei

Takaful TAIB Berhad

1994

Dutch east indies

PT Sayarikat Takaful Indonesia

1994

Dutch east indies

PT Asuransi Takaful Keluarga

1994

Dutch east indies

Asuransi Takaful Umum

1995

Singapore

Syarikat Takaful Singapore

1997

Singapore

Keppel Insurance Co. Ltd

1993

Malaya

Malaysia National Insurance Takaful Company

1995

Katar

Muslim Insurance Company of Qatar

1997

UAE

Dubai Takaful Insurance Co.

1999

Trinidad

Tobago Takaful Friendly Society

1997-2000

USA

First Takaful USA

Beginning: Prospects for Evolution of Takaful in the twenty-first Century by Omar Fisher and Dawood Y.Taylor ( hypertext transfer protocol: //www.takaful.com.sa/m4sub3.asp # ans2 )

2.7 Islamic Mutual Fundss

Over the old ages, Islamic fiscal concern has seen a high growing. This growing in Islamic concern has matched by the growing of the common fund industry. This subdivision gives an overview and lineations of Islamic common financess from many facets.

2.7.1 Islamic Mutual Fund Fundamental and Screening Process

Islamic common fund and conventional common financess are similar in their features. Islamic common financess operate harmonizing to Sharia, and it divided into many types. As we saw in the old subdivisions Sharia demoing engages fulfilling trading regulations talked about old for illustration being free from involvement ( Riba ) , heavy guess ( Gambling ) and uncertainness ( Gharar ) . And non puting in non-Sharia compliant activities such as casinos, intoxicant, gaming, dark nines, porc or porc merchandises, baccy or erotica. There is an independent Sharia board which put the regulations and instructions and evaluates financess public presentation and operations carry throughing the aforementioned Sharia regulations. This Sharia board normally consist as a lower limit of three bookmans that filter non-Sharia actions ( Iqbal and Molyneux 2005, p.158 ) .

Particularly, Sharia board examines closely Muslim equity common financess since they began puting in stock markets. It examine the beginning of company and trial eliminate the company stock if the proportion of inadmissible activity greater than 10 % ( Shata 2003 ) . As good, if the debt to equity ratio for companies is greater than 33 % , this means that the income of company ‘s stock would non be acceptable as Sharia board has determined. Harmonizing to Iqbal and Molyneux ( 2005 ) this is known as negative showing utilizing fiscal statements. Besides, debt trading to finance investings is non allowable ( Elfakhani and Hassan 2005 ) . Finally, Islamic common financess have to pay out an Islamic part portion ( Zakah ) at about 2.5 proportions of returns ( Al-Qaradawi 1999 ) .

2.7.2 History and Current Trend of Islamic Mutual Fundss

Muslim establishments have begun to broaden the coverage of Islamic instruments at the beginning of 1980s, to cover demands of people who have a high net worth in the Gulf Area. Special purpose vehicles ( SPVs ) intended with Sharia jurisprudence to pull off the nest eggs of the clients. These financess played an of import function in fiscal markets, whereas it was in their babyhood ( Girard and Hassan 2005 ) .

Amana income fund was found in June 1986 in the U.S. as the first Islamic common fund, there were 29 Islamic common financess by 1996 ( Failaka 2007 ) . The most common type of Islamic financess was Opened-ended financess in 1990s. In add-on, the FTSE Global Islamic Index and Dow Jones Islamic Market Index ( DJIM ) were lunched. The FTSE planetary Islamic index consists of 1000 Sharia compliant equity common houses and the Dow Jones consists of about 2000 Sharia compliant equity common houses which classified by its location ( part ) and investing type ( Hayat 2006 ) .

In Figure 2.3 there is a comparing between the public presentation of Dow Jones Islamic Market World Index and the public presentation of S & A ; P 500 conventional index in the period from 1999 to 2009. The figure illustrates a high correlativity between both indexes.

Figure 2.3: DJIM Compared with S & A ; P 500

Beginning: Vermorel C. 2009

( hypertext transfer protocol: //blog.vermorel.net/2009/04/s-500-against-dow-jones-market-large.html )

In Figure 2.4 there is a comparing between the public presentation of Dow Jones Islamic Market World Index and the public presentation of Dow Jones World Index in the period from 1999 to 2009. The figure illustrates that in the 10 old ages period both indexes remain the same degree, but the Dow Jones World Index seems to be a spot more hazardous, volatile and outperforms to DJIM.

Figure 2.4: DJIM Compared with DOW Jones World Index

Beginning: Vermorel C. 2009

( hypertext transfer protocol: //blog.vermorel.net/2009/04/s-500-against-dow-jones-market-large.html )

We dealt in this chapter to an overview on common financess industry which it started a definition and advantages of common financess, besides we talked about the history of common financess industry and its tendencies, and we had a brief thought about types of common financess. Finally, this chapter gave us some information about the Islamic finance and its constituents Islamic banking, Islamic insurance and Islamic common financess with concentrating on Islamic common financess.

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