Index Funds and Trackers: Back to Basics

Index Funds and Trackers: Back to Basics

Introduction to 
investment funds
The term “fund” covers a number of terms 
including mutual funds, collective investment 
undertakings, collective investment schemes or 
pooled investment vehicles and these terms are 
generally used interchangeably. A fund can be 
classified in various ways e.g. by its structure, its 
investment strategy or its regulatory status. 
Funds offer investors the opportunity to 
pool their money with other investors in an 
investment that’s managed by professional 
investment managers. Funds generally invest 
in stocks, bonds or other securities according to 
each fund’s objective. This paper focuses on a 
particular type of fund known as index funds. 
Index funds are a type of mutual fund that use a 
specific investment style called passive investing. 
This paper will also look at different indices in 
the global market. The benefits of indexing will 
be discussed followed by a Shariah analysis of 
conventional platforms to invest in index funds. 
The paper concludes with a look at Shariah indices

What is an index fund?
An index fund is an investment fund that attempts to replicate the performance of a given index of stocks 
or some other investment type. That can include bonds or even a narrow subset of a financial market, 
say, small-cap biotech companies. Index funds are mutual funds or exchange-traded funds (ETFs) that 
invest in such a way that the performance of the fund closely tracks that of the target benchmark index, 
such as the S&P 500. Because of their passive nature, index funds generally have lower expenses and 
potentially higher long-term returns than actively-managed funds. 
Most index funds work by identifying an already well-known index, usually maintained by a respected 
third party, then building a fund that either owns every asset in the index or achieves the same end by 
holding similar securities. For example, an S&P 500 index fund can invest in all 500 components of the 
market index in order to replicate its performance.

Index Funds and Trackers: Back to Basics