Should You Invest In Sukuk In Malaysia?

A bond is a loan issued by governments or businesses in order to raise funds. Bonds are a great low risk investment that generates consistent income through the payment of interest.

However, the bonds do not comply with Sharia law as they involve interest payments, which is prohibited by Islamic law. So what is the alternative for those who wish to invest in sharia compliant assets?

Here is where sukuk Between.

What is the sukuk?

A sukuk is the Islamic equivalent of a tie. It is a financial certificate that represents the ownership of certain assets. When companies or governments aim to raise funds for certain projects, they issue a sukuk and use the investment procedures to purchase assets. In return, investors will receive periodic payments and a principal investment when the sukuk matures.

Sukuk are considered Shariah compliant because they do not involve interest payments (as conventional bonds do). Instead, the payments come from profit sharing or the leasing of assets.

Should you include sukuk in your portfolio?

A sukuk is a low risk investment that offers stable returns. Investing in this area can be a good idea if the following conditions apply to you:

1. You want constant income

A sukuk makes regular payments (that is, on an annual, semi-annual or quarterly basis) to its investors. These payments are fixed and predetermined, which makes sukuk a good investment if you need predictable income on a regular basis.

If you invest in a sukuk fund, the fund manager may distribute these payments to you in the form of monthly, quarterly, semi-annual or annual dividends.

2. You must reduce the risk of your portfolio

As you age, you may need to reduce your risk by increasing the proportion of low risk investments in your portfolio. This is because older investors have less time to recover if their portfolios suffer huge losses. Investing in sukuk can help you reduce your portfolio risk as sukuk are less volatile than other asset classes like stocks. This helps protect your portfolio when the markets are volatile.

3. You must preserve your capital

If you need to cash out your investments soon – for example, you plan to retire in a few years – you should focus on preserving capital. It means preserving your investments and avoiding losses.

Investing in sukuk is a good way to preserve your capital. Unlike stocks, where prices can go up or down, the value of a sukuk will not change unless you sell it in the secondary market (i.e. to other investors) at a different price. If you wait for the sukuk to mature, you will receive your invested capital.

How many returns can sukuk offer?

The returns of a sukuk may depend on its credit rating. A sukuk with a lower rating is considered riskier, but will offer higher payouts. A sukuk with higher scores is less risky, but will offer lower payouts.

If you invest in a sukuk unit trust fund – that is, a fund that pools money from many investors to buy a group of sukuk – the fund can manage its performance and volatility by buying sukuk with different notes and deadlines.

For example, Principal Asset Management’s Principal Islamic Lifetime Sukuk Fund aims to achieve above-average income in the medium to long term. It does this by investing in a diversified portfolio of sukuk and other sharia-compliant investments. Here’s how the fund has performed since its inception:

Average yield pa
(October 2004 – September 2020)
Main Sukuk Islamic Lifetime Fund
5.9%

Disclaimer: We recommend that investors read and understand the contents of the prospectus of funds and PHS available on the main website which have been duly registered with the Securities Commission Malaysia. Unit prices and income distributions, if any, may go down or up. Investments in funds are exposed to a range of risks. There are fees and expenses associated with investing in the funds. Past performance does not reflect future performance.

An annual return of 5.9% means that if you had invested RM 1,000, you would have received RM 59 back that year. However, it is important to keep in mind that past performance is not necessarily an indicator of future performance.

Are sukuk funds a good investment in times of economic volatility?

Investing in sukuk is suitable for all market conditions as it helps manage your portfolio risk and provide diversification.

But in times of economic volatility – like this – having sukuk in your wallet can be especially useful. This is because sukuk pay a fixed rate of return, which neither increases nor decreases based on market conditions. This gives you a stable income even when times are uncertain.

In uncertain markets, having a portion of low-risk investments like sukuk can also help minimize the effect of losses on stocks in your portfolio. For example, the FBM KLCI, an index that tracks the 30 largest companies in the Malaysian stock market, suffered a loss of 5.9% from the start of the year through October 21 (source: http: // www. bloomberg.com/quote / FBMKLCI: IND). In contrast, the Principal Islamic Lifetime Sukuk Fund gained 5.02% over the same period (source: https://www.bloomberg.com/quote/SBBHFIZ:MK).

How to invest in sukuk

Previously, it was difficult for regular investors to invest in sukuk – at least RM250,000 was required to invest directly through a bank.

But these days, you can invest in sukuk unit trust funds. They are much more accessible than buying sukuk directly, due to the low minimum investment requirements. For example, the Principal Islamic Lifetime Sukuk Fund has a minimum initial investment of only RM2,000, while each subsequent investment requires as little as RM500.

If you are interested in investing, consider how much of your portfolio should be allocated to sukuk. This involves determining your risk profile and then defining a portfolio allocation. For investors with a low to moderate risk profile, the sukuk can be a great way to manage your risk, diversify your portfolio, and provide stable returns, while investing in a socially responsible manner.

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Jothi Venkat

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