Why should you be investing?
It does not matter how much you put away or earn in a month, the fact remains that all of it would be for naught if you have not planned your finances in a way that allows you to reap benefits in the future. You could be earning a comfortable wage at the moment but it may not be enough to cover future events like a serious illness or a celebration that requires a sum of money that you cannot really afford. Yes, a lot of people will tell you that you can go in for loans to cover such expenses but that thing with the loan is that you still have to pay it back. The instalments for the loans can put a strain on your monthly finances and, more to the point, does not offer you any returns in the future. What you need to do is to invest your money in such a way that when there is a need in the future, you have money to spare and here is how you can do just that.
How to Get Money to Invest?
Before you can start investing you need to do a few things. The first of which is to make a list of all your monthly expenses and see how much you can save and were. Once you have a sum of money that can be spared, you need to make a list of all the credit you have to pay back. This will include considerations for payments towards loans and credit cards. If you can, then clear your credit cards at the earliest possible as this will free up some more money for you. Once all these activities are done, you should arrive at a sum that you can save, which you can move to a separate account so as not to spend it by mistake. Once that is done you can either invest every month or in a lump sum after a considerable amount has been collected.
What are your options in Investments in the UAE?
There are multiple options available in the UAE in terms of investments. These offer a range of benefits and rewards but can, at times, come with a risk. These options can also be either those that can be considered part of conventional investment or those that more compliant with the rules of Islamic financing. The choice is yours on how and where you wish to invest. Keeping that in mind, here are some options that you can use to save some money.
- Savings Accounts: A savings account is an account where you just deposit your money into an account and it gathers interest over time. This can be considered a safe way of investing because the money in the account is not really invested in any other instrument and is always available to you. The account can also be maintained in a multitude of currencies depending on the banks policies.
- Time Deposits: Time deposits are account where money is invested for a fixed period. During such a period, the money will earn an interest which can be made available to you on a monthly, quarterly, half-yearly or on maturity. This too is an investment where the risk to the money is almost negligible. These deposits can be opened in currencies like AED, USD, GBP, Euro, etc. The interest that is offered for such deposits is also governed by the currency in which it is opened.
- Life Insurance: A big question that can haunt any working professional is about what would they do for an income once they are old or when they retire. In case the company you work for does not offer a solution, you can use a life insurance policy to cover such concerns. There are particular life insurance policies that provide you with coverage against death, critical illness and disability that can leave you or your family without a source of income. There are other insurance products too that can offer protection and benefits under specific circumstances.
- Health Insurance: With the cost of medical help rising rapidly, it only makes sense to invest in health insurance for the simple reason that should something happen and you get slapped with a massive hospital bill, you will be able to pay it using the insurance rather than decimating your life’s savings for it.
- Home Insurance: This is as much an investment as any other since insurance for your home can help save you from having to pay extensive amounts for repairs or renovation of the house as a result of some untoward event. It may not be something that will provide a maturity value after a fixed period of time but it can be something that helps you save money in case of certain eventualities.
- Auto Insurance: Much like home insurance, a car insurance is an investment that will save you from heavy expenses should something go wrong with the car that you spent so much on. Such an insurance will cover you for damage that may be caused to the car in an accident or the loss of a car to theft or certain other unfortunate incidents. Once again, there is no return on this investment but it does help ensure that should something go wrong, you won’t have to destroy savings to pay for damages.
- Mutual Funds: Mutual funds are a way of investing in the markets that allow you to invest on one instrument that then invests the money in various equities and money markets. The advantage of a mutual fund investment is that it allows you to invest in the equity market without having to worry about knowing the markets or having to trade actively. The fund managers manage all of that for you. The risk factor that comes with investments in equity markets does apply to mutual funds but it is minimized a bit since the investments are made in multiple instruments allowing the portfolio not to suffer too much should one industry suffer from losses.
- SIP: An SIP is a systematic investment plan that can be opted for when it comes to investing in mutual funds. It allows you to invest smaller amounts at regular intervals which reduces the burden of saving up loads of money to invest in one lump sum. It can also help you take advantage of the shifting markets because you won’t invest all your money when the market is down or up.
- Direct Investments: These are investments that you can make directly in the stock and share markets. You can even invest directly in bonds but the thing to remember here is that while the potential for returns is really good, so is the potential for losses. Such investments might require you to monitor the markets regularly
- Gold: Investing in gold can be a good idea since the metal has a healthy market and quite a bit of demand. If you don’t know how to go about it, there are banks that can help you do just that.
- Property: If you plan to be in the UAE for an extended period of time, investing in property can be a good idea. You could use such an investment to either provide you with a place to stay or to provide you with a regular income by either turning it into a commercial property or a residential property for rent. To facilitate this many of the banks in the UAE offer a host of conventional and Islamic home loans too.
- Forex: A relatively new addition to the options of investments in the UAE is Forex Trading or trading on foreign exchange. It works a bit like the stock markets and can be a venue that helps your wealth grow. However, much like the stock market investments, it is not without its share of inherent risks.
These are investment options that tend to follow the principles of Islamic finance and meant for anyone to participate in. Should you be someone who wishes to invest in Islamic products then you can do so using these investments.
- Sukuks: Investing in Sukuks is almost the same as investing in bonds with the slight difference in the way the instrument works. When a person buys a bond, they get ownership of the debt but with a Sukuk they become partners in ownership of the asset and share both the risks and the returns.
- Mudaraba: This is an instrument that can be used to invest in a project. How it works is very similar to how loans work where one party lends another money to be used for a project. The management of said project remains the prerogative of the person borrowing the money. How it can work in case of a bank is that you, as the investor, can invest the money in a Mudaraba account which the bank will then use to provide loans to customers.
- Musharaka: This is another tool that can be used by banks to provide finances for projects. The bank can take its funds and add to them the funds of the investors and offer the total sum to a potential borrower. Unlike with Mudaraba, those that led the money can engage in the management of the project, however, such involvement is not mandatory. When it comes to the risks and rewards, they are borne by the investors but only an amount proportionate with the amount they invest.
- Takaful: This is an Islamic product that acts as an insurance as well as a savings option. In this plan you can contribute an amount that suits you and a part of that amount may be invested in funds that are compliant with the Islamic finance.
- Mutual funds: Mutual funds offered in the UAE also have those that are governed by the principles of Islamic finance that make them a good investment option for those looking to invest in such products.
How to choose the right Investment Option?
Investment plans can be as varied as the people taking them. Since our concerns are determined by our personal situations, the investment plan chosen should reflect the same. Here are some tips that might help you choose the right investment plan for you.
- The best thing to do is not to concentrate only on one option. Try to diversify the portfolio as much as possible. Concentrating only on one instrument prevents you from taking advantage of other schemes.
- Another thing you must always do is to decide upon your appetite for risks. If it happens to be small, in the sense that you don’t feel that you can afford too much risk on investments, structure the investment in such a way that allows avoid big risks.
- Always ensure that you are investing in a plan that is being offered by a reputed and accredited organisation.
- Market research on how your intended investment is performing is also very important. For example if you decide to invest a substantial amount in gold when it is on the decline, you are likely to lose money.
Balancing Risks and Rewards
When it comes to investments, there is always a fine line between good and bad investment policies. The trick is to balance the risks and the rewards in the investment for which you can follow the following tips.
- Try not to invest all your money only in a safe product. If you were to invest all your money in a time deposit or even in a savings account, sure you’ll earn an interest on the funds held in these accounts but the returns will be much smaller since the interest on such products is not very high.
- Don’t invest everything in high risk products either. Suppose you too the sum total of a year’s worth or savings and invested the entire amount in the stock markets. Things would go fine so far as the companies that you invested in are doing well but should the stock prices fall, you stand to lose a sizable chunk, if not all, of the money you put in.
- Make a plan that includes different types of instrument. You can do this to invest part of the money in a risky product like shares or mutual funds and use the remaining to put it in a time deposit or a savings account.
How much should you invest?
Don’t invest more than is necessary. Sure, the allure of higher returns is quite tempting but when investing, you should also take into account the fact that you might want to put aside some money for the sake of liquidity in case of an emergency. You will also have to make sure that you don’t invest so much that you find yourself hard pressed to fulfil even your very basic day to day needs.
The one thing that you must always keep in mind is that the same investment plan cannot always suit everyone. An investment plans, and should, be tailor made to your needs and specifications before being put into action.