What are Mutual Funds?

Simply, Active Mutual Funds invest in a changing list of securities, chosen by an investment manager. But before we get into Mutual Funds specifically, I want to share with you the 3 types of funds that are available to invest in:

1. Mutual Funds

Mutual Funds track a number of company’s stocks that follow a number of companies on the stock exchange, but aren't following a set index (i.e. the top 20 or 500 companies or a particular sector).
They are actively managed by a person or company who are always changing their investments and buying and selling stocks actively.

They’re more expensive to purchase as you’re paying a fee for them to be managed.

The key benefit of a Mutual Fund is that you can achieve more than an 8% investment. But it is a HIT or a MISS.

2. Index Funds

These are tracking specific stocks for a number of companies, usually the top 10, 20 or 500 companies within a particular sector or market.

The key difference is that they’re passively managed, which means there’s no human being or company actively managing it.

They have low expense ratios (which means you can have a greater return).

The average return of an Index Fund is 8% accounting for yearly inflation.

3. Exchange Traded Funds (ETF)

A type of security that combines the flexibility of stocks with the diversification of mutual funds. Index Funds cannot be traded but ETF’s can. Like Index Funds, these are also not actively managed. Hence have lower expense ratios.

Mutual Funds are popular because they are advertised to get more than an 8% return, basically beat the index funds.. However they key pitfall is that you may be liable for Capital Gains Tax, without you even realizing it!

If you hold your security for longer than a year, then you won’t be liable for tax on the investment. With a Mutual Fund, your Investment Manager may sell it within a year of obtaining it, which means you’ll be liable for the tax on the investment.

Mutual Funds are performance based, so security that has gained value is almost always SOLD (regardless of how long the stock has been held for). Investment Managers maintain their reputation in this way, but you may not see the full picture of the huge tax liability YOU WILL HAVE, when these securities are sold within a year of obtaining. The profit, loss and capital gains taxed are passed to the investor.

So what’s the solution?

The easiest solution if you don’t want to be liable for Capital Gains Tax is to invest in an Index Fund or ETF. There are many Halal options available to you in both.

My professional consulting

I professionally consult with muslim families. When I consult with my clients, I NEVER give blanket advice around where you should invest. Each person’s circumstances are unique and you shouldn’t take blanket advice based on what’s currently fashionable/what’s currently ‘In’.

People should not be making a personal financial plan for you unless they have all the information on your personal situation. Anything that is free, you should not apply it to yourself unless you have a legal contract with the financial or investment advisor.

This ensures that your interests are protected and you are getting financial advice applicable to YOU.

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