A Step-By-Step Guide To Building A Shariah Portfolio

A Step-By-Step Guide To Building A Shariah Portfolio



Heard about Shariah investments, and keen on including them in your portfolio? Not only can they offer stable returns, they’re also a great way for those who want to invest in a socially responsible manner.

But how do you build a great Shariah portfolio? It’s not all that different from building a conventional one. We’ll take you through it step by step.

What is an investment portfolio?

First off, what is a portfolio? It’s just a way of referring to the collection of investments that you own. This is made up of a mix of different asset classes (equities, bonds, money market funds, mixed assets or other asset classes).

Having a portfolio helps you plan for financial goals like buying your first home, affording your child’s education, saving for travelling, retiring comfortably or performing religious activities such as umrah or hajj.

What’s the difference between a Shariah and a conventional portfolio?

In a Shariah portfolio, its investments must comply with the Islamic law. They must adhere to certain ethical standards and cannot be involved in activities that are prohibited in Islam or have detrimental effects on society, such as gambling or alcohol. By contrast, a conventional portfolio does not have these restrictions – it only focuses on capital returns and income growth.

Find out more about how Shariah investments differ from their conventional counterparts here.

What is your risk profile?

Before you start building a portfolio, you’ll have to know what your risk profile is. In other words, how much risk are you comfortable taking on when investing?

Your retirement age also affects your risk profile. If you have many years left to retirement, you can generally tolerate a higher level of risk, as you have many years to recover from any short-term volatilities in the stock market. But if you are retiring soon, you may not be able to take as much risk, as you’ll need to preserve your capital for retirement.

Take this short quiz to estimate your risk profile:

ConservativeYou want to safeguard your investment capital. As long as your capital is preserved, you’re willing to accept low or minimal potential returns.
Mildly conservativeYou are willing to accept returns that are potentially higher than banks’ fixed deposit rates, as long as your capital is exposed to minimal risk.
ModerateYou are willing to take on a moderate risk to achieve potentially moderate returns.
Mildly aggressiveYou are willing to take on higher risk to achieve potentially high returns.
AggressiveYou want to optimise for the highest returns possible. You are willing to take on a very high level of risk to achieve potentially high returns over the long-term.

How do you build a portfolio based on your risk profile?

The next step is to figure out what mix of asset classes you want to hold. This is referred to as your asset allocation. There are three main asset classes:

  • Fixed income. This class includes investments like bonds and sukuk that provide consistent returns. They involve lower risk, but can deliver potentially lower returns than equities.
  • Equity. This refers to stocks. It represents shares of ownership in specific companies. Equities involve higher risk, but can deliver potentially higher returns than fixed income investments.
  • Cash/others. This refers to any money that you hold. This can include money that you have in your bank account, or money that is invested in cash equivalents, like money market funds. This is the least risky asset class.

Okay, but how much fixed income, equities, cash or other investments should you hold in your portfolio? Here’s where your risk profile comes in handy. Depending on your risk profile, you could consider the following allocations:

Source: Principal as of August 2020

Your asset allocation is important because it helps you reduce risk through diversification. If an asset class in your portfolio underperforms, your other asset classes could offset these losses.

However, while having the right allocation is important and may help you mitigate some investment risks, it does not ensure profit or completely protect you against losses.

How do you choose the investments that go into the portfolio?

Next, you need to decide which investments go into each asset class. You can do this by selecting individual stocks or bonds, but an easier way is to invest in unit trust funds. Each unit trust fund invests in a group of equities, fixed income or cash equivalent investments, so you achieve instant diversification.

For example, here are the recommended funds by Principal Asset Management as of August 2020 according to your risk profile:

Shariah-compliant investor
Conventional investor
Principal Islamic Money Market Fund100%Principal Islamic Money Market Fund100%
Annualised expected return3%Annualised expected return3%

Mildly conservative
Shariah-compliant investor
Conventional investor
Principal Islamic Lifetime Sukuk Fund70%Principal Lifetime Bond Fund90%
Principal Islamic Lifetime Enhanced Sukuk Fund28%Principal Islamic Lifetime Enhanced Sukuk Fund10%
Principal Islamic Global Sukuk Fund2%
Annualised expected return5%Annualised expected return5%
Shariah-compliant investor
Conventional investor
Principal Islamic Lifetime Balanced Fund70%Principal Lifetime Balanced Income Fund70%
Principal Islamic Lifetime Balanced Growth Fund30%Principal Islamic Lifetime Balanced Fund20%
Principal Global Multi Asset Income Fund10%
Annualised expected return7%Annualised expected return7%
Mildly aggressive
Shariah-compliant investor
Conventional investor
Principal DALI Asia Pacific Equity Growth Fund41%Principal Global Real Estate Fund28%
Principal DALI Global Equity MYR34%Principal DALI Global Equity MYR21%
Principal DALI Equity Fund25%Principal Malaysia Titans Fund20%
Principal Asia Pacific Dynamic Mixed Asset Fund20%
Principal Asia Pacific Dynamic Income Fund11%
Annualised expected return8%Annualised expected return9%
Shariah-compliant investor
Conventional investor
Principal Islamic Asia Pacific Dynamic Equity Fund39%Principal Global Technology Fund55%
Principal Islamic Enhanced Opportunities Fund31%Principal Islamic Malaysia Opportunities Fund18%
Principal Islamic Small Cap Opportunities Fund20%Principal Greater China Equity Fund17%
Principal Islamic Malaysia Opportunities Fund10%Principal China Direct Opportunities Fund5%
Principal Greater Bay Fund5%
Annualised expected return9%Annualised expected return12%
Disclaimer: The information above does not take account of any investor’s investment objectives, particular needs or financial situation. Investors should consider whether an investment fits their investment objectives, particular needs and financial situation before making any investment decision.

The data presented is for information purposes only and is not a recommendation to buy or sell any securities or adopt any investment strategy. This material is not intended to be relied upon as a forecast, research, or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. ​

All expressions of opinion and estimates in this report are subject to change without notice. This report is not intended to be, nor should it be relied upon in any way as a forecast or guarantee of future events or investment advice regarding a particular investment or the markets in general.

The asset allocation is subject to change from time to time.​

Why build a portfolio with Shariah unit trust funds?

Investing in Shariah unit trust funds is not just great for diversifying your portfolio. It may also deliver better returns during financial crises. This is because Shariah screening excludes firms with too much debt. Shariah funds also don’t invest in bank stocks, which may underperform when the economy is weak. This may mean that Shariah unit trust funds could be less volatile when the market is uncertain.

Of course, there’s also the emphasis on socially responsible investing, as Shariah funds cannot invest in industries that are prohibited in Islam. This makes them a good choice for those who wants to align their investments with Islamic values, or even non-Muslims who want to invest ethically.

Ready to build your portfolio? Learn more about how to invest in Shariah-compliant funds with Principal.

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