Purpose -One of the implications of Islamic investment principles is the availability of Islamic financial instruments in the financial market. The main aim of this research is to observe the differences in terms of performance between Islamic and conventional mutual fund in the context of Malaysian capital market. Design/methodology/approach -To achieve the major objectives of this paper standard methods wereused for evaluating the mutual funds performance, for example, Sharpe index and adjusted Sharpe index, Jensen Alpha, Timing and selectivity ability. The scope of the paper is to measure the relative quantitative performance of funds which was managed based on two different approaches. Findings -The basic finding of the paper is that Islamic funds performed better than the conventional funds during bearish economic trends while, conventional funds showed better performance than Islamic funds during bullish economic conditions. In addition to that finding, both conventional and Islamic funds were unable to achieve at least 50 per cent market diversification levels, though conventional funds are found to have a marginally better diversification level than the Islamic funds. The results also suggest that fund managers are unable to correctly identify good bargain stocks and to forecast the price movements of the general market.Research limitations/implications -The main limitation is that the samples of conventional and Islamic mutual funds were from one developing market. The findings could be better validated if the sample included the mutual funds from other developed and developing economies, where both Islamic and conventional funds are available. Practical implications -The findings suggest that having Islamic mutual funds in an investment portfolio helps to hedge the downside risk in an adverse economic situation. Originality/value -So far there is no published evidence on the relative performance of Islamic and conventional mutual funds in Malaysia as well as other developing countries. Therefore, this paper adds new knowledge to the mutual funds literature.