The Potential of Using the Turnover Ratio to Estimate the Zakat of Investment Funds

Abstract

The objective of the paper is to evaluate the possibility of using the turnover ratio as an indicator of the act of trading by investment fund managers in the financial markets, based on the fiqh opinion that links the zakat of investment funds to the extent of the fund manager’s activity in trading the components of fund’s portfolio. The paper concluded that the investment portfolio turnover ratio is a suitable estimate for the fund manager’s trading activities. Based on literature studied the relationship between the turnover ratio and three variables: (1) the performance of investment funds, (2) the fund investment time horizon and (3) the fund capital gain tax, the paper derived six testable hypotheses about the zakat of investment funds. The paper concluded with several practical recommendations.