Conventional or Shariah Compliant Investment: Performance Evaluation of Mutual Funds in Pakistan

Abstract

The current study was initiated to compare the performance of conventional and Shariah-compliant mutual funds in Pakistan, keeping in view the contradictory opinions found in the literature in this regard. The data utilized to conduct the analysis covered the time span 2013-2021. Assessment of risk and return tradeoff was made with three ratios, namely Jenson’s alpha, Treynor ratio, and Sharpe ratio by evaluating the monthly returns of conventional and Shariah-compliant mutual funds. The findings revealed that Shariah-compliant mutual funds outperformed conventional funds in terms of absolute risk measure, higher Sharpe ratio, and low coefficient of variation. While, in terms of funds’ exposure to systematic risk, mixed results were obtained for both types of funds. The results produced sufficient information about the risks and returns associated with the two kinds of mutual funds which would enable fund managers and investors to make informed decisions while selecting the best mutual fund, thus generating maximum returns and with minimum risks.