Abstract
Purpose This study aims to comparatively analyze the systematic, idiosyncratic and downside risk exposure of both Islamic and conventional funds in Pakistan to see which of the funds has higher risk exposure. Design/methodology/approach The study analyzes different types of risks involved in both Islamic and conventional funds for the period from 2009 to 2016 by using different risk measures. For systematic and idiosyncratic risk single factor CAPM and multifactor models such as Fama French three factors model and Carhart four factors model are used. For downside risk analysis different measures such as downside beta, relative beta, value at risk and expected short fall are used. Findings The study finds that Islamic funds have lower risk exposure (including total, systematic, idiosyncratic and downside risk) compared with their conventional counterparts in most of the sample years, and hence, making them appear more attractive for investment especially for Sharīʿah-compliant investors preferring low risk preferences. Practical implications As this study shows, Islamic mutual funds exhibit lower risk exposure than their conventional counterparts so investors with lower risk preferences can invest in these kinds of funds. In this way, this research provides the input to the individual investors (especially Sharīʿah-compliant investors who want to avoid interest based investment) to help them with their investment decisions as they can make a more diversified portfolio by considering Islamic funds as a mean for reducing the risk exposure. Originality/value To the best of the author’s knowledge, this study is the first attempt at world level in looking at the comparative risk analysis of various types of the risks as follows: systematic, idiosyncratic and downside risk, for both Islamic and conventional funds, and thus, provides significant contribution in the literature of mutual funds.
Highlights
Mutual funds are considered an important method of investment
As this study showed that Islamic mutual funds have lower risks compared to their conventional counterparts, fund managers can focus on launching Islamic mutual funds to attract risk-averse Sharīah-compliant investors
Multiple-factor models are introduced by the researchers, which are widely used in the finance literature for analyzing the performance and risk of stocks and mutual funds
Summary
Mutual funds are considered an important method of investment. They represent an indirect way to invest for individual investors who do not possess relevant knowledge and expertise to invest directly. There is a growing trend in the mutual funds industry of Pakistan for asset management firms to have both Islamic and conventional funds. Investors are more interested in risk and return analyses of mutual funds because they make investment decisions on these bases. Mutual funds are good investment vehicles, they are not free from risk. They involve various kinds of risks such as market risk, fund-specific risk, downside risk and others. Sharīahcompliance risk is involved in Islamic mutual funds
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