Dubai: Saving money remains a top priority among many residents in the UAE, but unfortunately, only a few are able to set aside a huge portion of their income to secure a comfortable retirement or fulfil their financial goals in life.
According to a survey by Payfort, an Amazon company, the majority of people living in the UAE (38 per cent) are able to save only 10 per cent of their income, while only less than a quarter (23 per cent) manage to leave 10 to 25 per cent of their earnings untouched. A worrying 28 per cent, nearly three out of ten people, are not saving at all.
If the majority of the earners make less than Dh10,000 a month, that means most people barely manage to spare less than Dh1,000—or nothing at all-- every payday.
But financial advisers say those who are determined to build their income should not despair, because no matter how small the savings they make each month, be it Dh100, Dh250 or Dh1,000, they can still see their money grow. The key is not to stash that unspent income in a jar or zero-interest bank account. Invest it.
In fact, people don’t need to set aside a ton of dirhams to become an investor and it doesn’t require a master’s or PhD to put that small money to work.
If, after all this time, you have managed to put away only Dh2,000, here’s what you can do with it.
Invest in stocks
Stocks are one of the most popular investment options for those who don’t belong to the high-net-worth segment. They are quite affordable and you can buy shares from some of your favourite companies for less than Dh100.
It is ideal to buy multiple stocks, say, a minimum of five or six, to have a diversified portfolio.
It is important to note, however, that when buying stocks, one must enlist the services of a discount broker instead of a full-service professional, which only works with investors who have a lot of money to invest or those who can afford to pay a high minimum deposit and commission.
This can be done by opening an account with an online discount brokerage firm. The other option is to buy shares directly from a company, if you want to save on brokers’ fees.
Think exchange-traded funds
Like stocks, exchange-traded funds (ETFs) can be purchased at low costs through a broker, and the investor can invest as many shares as they like.
ETFs use pooled money from a number of people to acquire a diversified portfolio which may include stocks, bonds, commodities. They are traded like stocks and can offer a good return.
Since diversification is the key when investing, no matter how small or big the seed money is, it is best to set aside a portion of your Dh2,000 for some ETFs.
If you don’t have the time to do some research on your own to pick the best stocks, ETFs or other small investment options to park your small savings in, you may want to invest in mutual funds.
By choosing this option, you can benefit from the expertise of a fund manager, who will do the homework for you – such as selecting the best securities, or stocks and bonds that could make your money grow. The good thing is, you don’t need hundreds of thousands of dirhams to start buying shares.
And like stocks and ETFs, mutual funds have also offered good returns to investors.
“Long-term investments in stocks, ETFs and mutual funds have shown to have outperformed almost every other asset class and they are poised to continue similar results for at least the next few generations,” said Vijay Valecha, chief market analyst at Century Financial Brokers. “The advantage of mutual funds is that the ticket size is not very big and thus does create an entry barrier for anyone.”
“Mutual funds [as well as ETFs] can prove to be a very attractive option for individuals wishing to invest lesser amounts, as they provide a cheaper alternative to direct stock purchases while still allowing for a sufficiently diversified portfolio,” advised Tyla Phillips, financial planner, Guardian Wealth Management.
Go for gold
The precious metal is regarded as a great store of wealth. Phillips recommends setting aside five per cent of the money for gold, to avoid getting your savings eaten away by inflation.
“Gold is also a commonly held asset in well diversified portfolios as it can be used to hedge against inflation. I would say that a 5 per cent holding in gold provides relative security, as well as adding to the diversification of a portfolio,” said Phillips.
“Gold is a safe haven and does well when equities do not perform, which adds a good diversification to mutual funds and other traditional investments. Gold is thus a good investment for everyone,” added Valecha.
But just because you've already parked your Dh2,000 in the suggested investment options, doesn't mean you can now sit down and wait for your money to grow.
Valecha said it is important to keep your investment growing -- aim to save more and invest it.
"All these investments should be done regularly in monthly or annual systematic investment plans (SIP)," said Valecha.
A few points to consider:
Be wary when investing in bonds
You might want to consider putting a portion of your Dh2,000 in bonds. While it sounds like a great idea, especially since there are a few bond options that don’t require a huge investment, some financial planners advised it is best to exercise some caution.
“Bonds can be a favourable asset class as they often provide a consistent income whilst also being considered low risk. However, I would recommend caution regarding investment in bonds currently as the promise of interest rate increases brings with it inevitable reductions in bond yields, said Phillips.
Valecha said bonds usually have heavy ticket sizes and low liquidity and is not the preferred asset class for the lower and middle-income group. “A few bond funds do make it easy to invest, though most are accumulators of various corporate bonds and thus should be studied carefully before investing.”
Stay away from forex, futures
If you only have a small amount to invest and don’t have any investment know-how, it is best to avoid complicated options like forex or futures.
“Forex and futures trading are high risk and high reward investments,” warned Valecha. “They are usually very complicated in nature and thus should be avoided unless one has a very thorough knowledge of the financial industry.”
Phillips agreed, saying that such investments require specialist expertise and the risks involved are not conducive for those who want to save for retirement.
“For investors wishing to start saving for their retirement, I would strongly recommend avoiding highly volatile investments such as forex or futures,” said Phillips.
“Individuals in this position need professionally managed diversification, aligned with their long-term goals and attitude to risk.”