Are Islamic indices a viable investment avenue? An empirical study of Islamic and conventional indices in India

Mahfooz Alam and Valeed Ahmad Ansari

International Journal of Islamic and Middle Eastern Finance and Management, 2020, vol. 13, issue 3, 503-518

Abstract: Purpose - This study aims to empirically compare the performance of Islamic indices vis-à-vis to their conventional counterparts in India. Design/methodology/approach - The performance of the Islamic and selected conventional indices is evaluated using various risk-adjusted performance measures such as Sharpe ratio, Treynor ratio, M-square (M2) ratio, information ratio, capital asset pricing model (CAPM), Fama-French three-factor model and Carhart four-factor model in India context. The period of study is from December 2006 to 2018. Findings - The risk-adjusted performance measures based on the Sharpe ratio, Treynor ratio, information ratio, the M2ratio show that the return of Islamic indices provides slightly superior performance. However, performance investigated using CAPM, Fama-French and Carhart benchmarks produce a statistically insignificant differences in return of the Islamic and conventional benchmarks. Research limitations/implications - The Sharīʿah-compliant indices can provide a viable, ethical and alternative investment avenue for faith-based investors as it will not make them worse off in comparison to the conventional benchmarks. This also offers opportunity to conventional investors for portfolio diversification. The promotion of faith-based investment can serve as a tool for financial inclusion to attract a huge segment of Indian population in the formal financial system. The findings of the study suffer from the limitation of small sample size and empirical methods used. Originality/value - This study contributes to the literature on the comparative performance of Islamic and conventional indices in general and emerging markets, in particular, using most recent data and covering a relatively long span of time. To the best of the knowledge, this is the first comprehensive study examining the performance of Islamic indices, using multiple Islamic indices and various risk-adjusted measures in the Indian context.

Keywords: Performance evaluation; Islamic finance; Sharīʿah compliance; Sharīʿah index (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:imefmp:imefm-03-2019-0121

DOI: 10.1108/IMEFM-03-2019-0121

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