Advantage No. 1: Less volatile

Firstly, Shariah-compliant funds will avoid businesses with high leverage, which tend to see swings in value during volatile markets. This means such companies under Shariah investing demonstrate higher resilience in times of economic uncertainty.

It also means that Shariah-compliant funds are less exposed to cyclical sectors such as finance, resulting in fewer drawdowns than conventional funds.

In the same vein, sukuk, a form of capital markets instrument, can be seen by as less volatile than conventional corporate bonds.

Advantage No. 2: Socially responsible

Muslims and non-Muslims alike may be drawn by the core ethical principles of Shariah investing. Experts meticulously screen portfolios to ensure compliance with Shariah principles.

These are often in line with sustainability goals which emphasise the well-being of the environment as well as individuals. For instance, investments are audited to see if business dealings are fair and transactions are transparent.

Another key characteristic is the exclusion of indebted companies, which are more likely to have weaker balance sheets and higher financial risk. This has helped Shariah-compliant mutual funds and Exchange-traded Funds (ETFs) to outperform non-Islamic equivalents.

For instance, the Dow Jones Islamic World Total Return Index, which measures the performance of Shariah-compliant companies, gained 12.98 per cent annualised over the last 10 years through March 31, 2023, while the broader MSCI All-Country World Index rose 11.63 per cent over the same period.

Limitation No.1: Fewer choices

Despite its advantages, Shariah investing still presents certain limitations. One of them is the direct result of its stringent requirements, which translates into fewer investment choices.

Conventional funds may provide better opportunities for outperformance due to the sheer fact that there are more available assets.

Nonetheless, the socially responsible attributes of Shariah funds may provide a premium valuation and hence, a better return over time. With time, the range of Shariah-compliant investment products and services will continue to grow as demand increases.

Limitation No.2: Niche sector

Even as Shariah investing grows in popularity, there is still much room to grow in terms of standardisation, public awareness, expertise and regulation.

For instance, there is a gap in the market for Shariah-compliant wealth management services, according to experts. Maybank aims to address this gap as part of its M25+ Plan to be a leading banking group in Islamic finance.

There are also limited issuers of sukuk, which is offered predominantly in two currencies – the U.S. Dollar and Malaysian Ringgit. Additionally, the universe of Shariah-compliant stocks is still minute compared to conventional stocks.  

However, despite these limitations, there will be more opportunities to be seized as the sector matures.