We find that while the pattern of investment in socially responsible funds is similar to Islamic funds, the motivation is not. To further test if investors view the two as substitutes, we compare how investments in the Islamic fund change when the alternative is a socially responsible fund. We find investors do not treat socially responsible funds differently from traditional funds. In particular, we find that religious investors continue to invest more in Islamic funds as well as retain more of those investments despite deteriorating financial performance, regardless of the alternative fund choice. This suggests that socially responsible funds are not viewed as substitutes of Islamic funds. This evidence, in addition to being one of our main contributions, has important implications for the communication strategies in the mutual fund industry. Even though a subsection of the Socially Responsible universe, Islamic fund managers should recognize that they cater to unique investor preferences and hence should communicate different salient features to attract and retain investors.

# **5 CONCLUSIONS**

In this paper we investigate what motivates investors in choosing religious investments. We present the results of a lab experiment, specifically designed to identify religious preferences and link them to their investment choices towards different types of investment funds. The finance literature investigates attitudes towards these investments, which are included under the label of socially responsible investments. However, observational data make it difficult to disentangle pecuniary from non-pecuniary motives due to the nature of these investments. Aside from their socially responsible label, these investments offer diversification opportunities and different riskreturn profiles, that may induce investors to prefer them to other traditional investments.

We overcome this issue of identification by exerting a high degree of control on the risk and return metrics using a laboratory study. Taking our cue from the growth in Islamic (Shariah compliant) investments, our experiment utilizes a sample from a large Muslim majority country (Pakistan) of students enrolled in a higher education institution and likely to be investors in the future. We find evidence that individuals displaying strong religious preferences also display a strong inclination towards investing in religiously affiliated investments, even when those investments decline in performance. We compare religiously affiliated investments with socially responsible investments and find that investors treat these funds differently. When pitted directly against each other, investors prefer religious investments over socially responsible investments, suggesting that the motivation behind investment behavior is different, even though they are classified under the same asset class.

Our results provide the first experimental evidence on religiously motivated investments and provide relevant evidence for both the literature and industry. Our study contributes to literature on the role of non-financial information in investment decisions by examining the influence of religious and social labels on fund allocations. It also contributes to literature on religiosity in finance by explicitly measuring religious preferences of investors and linking them to investment decisions. On investor loyalty, it provides additional evidence on how sensitivity to financial performance varies across levels of religiosity in investors. Lastly, it also provides suggestive evidence that nonpecuniary motives of Islamic fund investors differ from those of socially responsible funds, even though the two are often grouped together in the same asset class.

Our findings have important implications for industry stakeholders and policy makers. For Islamic fund managers, understanding that religious preferences are a predominant driver of flows means that communication strategies are most effective when tailored to highlight these features. Beyond marketing, such managers should also ensure that their investment styles are truly