Investing Guide - Mutual Funds
Mutual funds are an investment that allows a group of investors to pool their money and hire a portfolio manager.
If you want a comfortable retirement, you have to save for it. If you want to slap down a decent deposit on a new apartment, again, you have to start tucking money away today. Investing your spare cash isn’t easy, but whether you’re investing 100 AED or 1,000 AED, 10000 AED a month, here’s how to do it:
Even if you haven’t got much money left over after rent and dining out, saving something is better than saving nothing. Over time, it can build up into a worthwhile amount, especially if you crank up your contributions when you have more money to spare.
The long-term benefits of starting to invest early cannot be overstated, says Mr Taylor, senior wealth manager with Professional Investment Consultants.
“If you start in your 20s, that money has 30 or 40 years to grow before you hit retirement, which means it could grow into a sizeable sum. If it grows by 7 per cent a year, for example, your money will double in value every 10 years.”
Say you invest 100AED a month from age 25 into an offshore pension plan. By age 65, your contributions will be worth around 98,482 AED, assuming 6 per cent average annual growth after charges.
But if you don’t start until age 35, your 100 AED a month will turn into just 50,281 AED. “Those early payments have so much longer to benefit from the magical power of compound interest [where you earn interest on your interest],” Mr Taylor says, adding that the problem with investing a small amount such as 100 AED a month is that few offshore investment plans accept such small sums, and any growth will be eaten up by the charges.
Once you start saving larger sums, offshore investment plans become more attractive options, an independent financial adviser in Dubai. “This should give you the discipline to maintain your payments and will boost your chances of building a large capital lump sum.”
TBy making regular monthly payments, you benefit from something called “dollar cost averaging”. “Stock markets inevitably go up and down, but regularly drip-feeding money into your chosen investments will smooth volatility and reduces risk,” Mr Connor explains.
This means you actually benefit when markets fall, because your monthly payment buys more stock at the same price. “It also means you don’t have to worry about investing all your savings at the top of the market, which is a worry if you are investing a single lump sum,” Mr Connor adds. If you’re investing for at least five years, you should think about committing to an offshore contractual investment plan, Mr Connor says. “You have to decide whether you want to invest over a five, 10 or 15-year term. Make sure you can commit to your chosen term, because there are penalties if you withdraw your money early.”
A good offshore investment account should help you build a balanced portfolio by investing in a spread of stocks and shares, mutual funds and bonds, again, helping reduce risk.
If taking advice, check the adviser’s credentials carefully. See their qualifications, find out how long they have been operating within the offshore market, and make sure they have all the correct licenses,” he adds.
Two things matter when investing money: your goal and your time horizon, says David Hughes, divisional manager at wealth advisers PIC (Middle East). “Buying a house is a goal, for example, but doing so within the next three years is a time horizon. Being financially independent at 60 is a goal, your time horizon will depend on how old you are.”
Mr Hughes says the goal is what motivates people to save, but the time horizon determines which investments you choose. “If you’re looking to build up a deposit to buy a property over the next two or three years, you should keep the money safely in the bank, to protect its value against stock market volatility.”
Rather than a current account, pick a savings account to store that deposit. UAE interest rates are still low, with the highest around 2.25 per cent, but earning some interest better than earning none. But if you’re looking to save 10000 AED a month as part of your long-term retirement plan, you need exposure to stock markets. “Stocks and shares are more volatile, but should produce markedly better returns over time.”
If you’re investing over the long term you don’t have to worry so much about short-term market setbacks, plus again, you benefit from dollar-cost averaging. Mr Hughes says most people should invest in a spread of mutual funds, rather than taking the greater risk of buying individual company shares. It makes sense to build a diverse spread of funds, covering major regions such as the US, UK, Europe and emerging markets.
If you work in the UAE and plan to retire in the US, currency risk is less of a concern. But if you plan to retire elsewhere, you must pay much closer attention, says Jahangir Aka, head of SEI Investments, Middle East. “What really matters is your home bias. If you expect to retire in Florida, you should be collecting dollars. If you are set for London, it will be sterling. If it’s Paris, you want euros.” Although your home currency should be the priority, you should create a balanced mix of global investments with exposure to a range of countries and currencies to avoid overexposure to one currency.
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