The performance Islamic verses conventional mutual funds during extreme event: new evidence from Saudi Arabia

Purpose This paper aims to compare the performance of Islamic and conventional mutual funds in Saudi Arabia, focusing on their behavior during extreme events such as the Global Financial Crisis (GFC) and the COVID-19 pandemic. It analyses risk-adjusted returns, volatility and spillover effects to provide insights into the resilience and performance of these fund types under varying market conditions. Design/methodology/approach The study uses 22 years of data from 254 funds, covering 1,172 weekly intervals from 2000 to 2022. It uses financial ratios, panel data regression, CAPM, GARCH modeling, and Wavelet Coherence analysis to assess fund performance. The research examines four distinct periods: pre-GFC, during GFC, pre-COVID-19 and during COVID-19, allowing for a comprehensive evaluation across different market environments. Findings Islamic mutual funds (IMFs) consistently outperformed conventional mutual funds (CMFs) in terms of returns and volatility during both the GFC and COVID-19 pandemic, demonstrating lower systematic risk. While CMFs exhibited slightly higher returns prior to the GFC, IMFs showed greater resilience during economic downturns. The study reveals that IMFs may be a more strategic choice for investors during periods of economic uncertainty due to their diversification benefits and lower risk profile. Research limitations/implications The findings provide valuable insights for investors, fund managers and policymakers in understanding the performance dynamics of Islamic and conventional mutual funds during extreme market events. The research suggests that IMFs offer a potentially more stable investment option during economic crises, which could inform investment strategies and policy decisions in the Saudi Arabian financial market. Originality/value This study contributes to the understanding of mutual fund performance in the context of Islamic and conventional funds within Saudi Arabia, offering a comprehensive analysis across various economic cycles. It provides empirical evidence on the comparative resilience of Islamic mutual funds during extreme events, filling a gap in the literature on Islamic fund performance in emerging markets.