How to Invest in UAE?
The best investment strategy is one that is simple to understand and easy to put into practice.
The three-bucket investment is one such simple and proven approach to investing your savings efficiently.
It helps you classify and focus on your short, medium, and long term investment needs to fulfil diverse financial goals.
What is the 3 Bucket Investment Approach?
As the name and picture above suggest, it involves three virtual buckets, which classify your savings to address different financial needs & goals.
Bucket No 1 - To Achieve Financial Security.
Bucket One is for your Emergency Savings and Short Term Goals. Savings under this bucket should be into liquid or near cash investments.In these difficult times, when the coronavirus pandemic is still far from over, people with adequate emergency savings feel financially secure. They are more confident of weathering this storm without much difficulty.
The purpose of this bucket is to help you Achieve Financial Security, avoid panic and high-cost borrowing during emergencies.
I would recommend an emergency savings of at least three months of household income if you are single or a working couple without children. If you are a family with children, I would recommend 4-6 months of household income.
Once you have reached your emergency savings threshold(3- 6 months income), you can add more money to this bucket for short-term goals like Annual Vacation, Electronics like a smartphone, Laptop, TV etc...
It would be best to focus on filling this bucket at the earliest by allocating maximum savings to reach your emergency savings threshold. (3-6 months income)
After which, you can allocate 20-25% of your savings for other short term goals.
Focus on the Liquidity
The idea of investing in this bucket is not to earn good returns, but to have liquid funds for managing an emergency or a job loss, and to meet short-term goals...
All or most of the funds in this bucket must be accessible in 24 to 36 hours...
Because you are investing in very liquid or next to cash assets, the returns from this investment are usually meagre (1-3%), but that's ok.
People who do not have liquidity usually end up borrowing on credit cards or high-interest loans.
They spend more on interest and sometimes on late fees and penalties, causing more stress on their feeble financial situation.
Bucket 1 - Short-Term Investment Options in UAE
Investing in National Bonds is a good idea considering the safety, liquidity and a slightly better return on investment they offer.
You can buy National Bonds online, Money exchanges and banks. The minimum investment is AED3000 and additional top-up in the denominations of AED100.
The holding period is three months, and you can redeem the bonds across the counter via certain Money exchanges.
2. Virtual Banks/ Digital Accounts
Digital / Virtual bank accounts have become the in-thing they offer convenience at a low cost. They also offer deposit accounts known as goal accounts, helping you track and save for those goals.
You can create different goal accounts for emergency savings and other short term goals and set up automatic transfers from your main account. Liv, the largest digital bank in the UAE, pays up 1.50% Pa interest on your goal accounts.
3. FCNR Deposits for NRI
Foreign Currency Non-Repatriable are fixed deposits accounts in US Dollar and a choice of other foreign currencies. Based on your travel and immigration needs you can save in these accounts from period ranging from 1 year to 5 years.
In the event of emergency you can break the deposit, to withdraw your money without any reduction in capital, however the interest paid would be relatively lower.
Bucket No 2 - To Achieve Financial Well-being
Bucket 2 is for an aggressive investment strategy, helping to achieve short to medium term financial goals like;
Down Payment for Property
Buying your dream car
- Saving for your Dream Vacation
Investment in Real Estate
Paying off a mortgage and other debts
Saving for starting a business
Investments in this bucket are less liquid in the short term, with a maturity of 1 year to 5 years.
Allocation into this bucket can be between 10 - 30% of monthly disposable savings...
Also, Read - How to Invest? Where to Invest & When to Invest
Bucket 2 - Medium Term Investment Options in UAE
In the form of coins or Bars, Certificates, ETFs and Funds.
Gold was stagnant in 2017 but has seen a strong rally in 2018 and in 2019. Given that global equity valuations are high It can be a safe haven when other asset classes are going down in value.
Also, there is no VAT on 24 carat gold bars, so it can be a good idea to invest in gold.
Trading Accounts / Offshore Investment Trusts
Trading accounts like Saxo Bank, SotckAl provide access to a wide range of investments like funds, Low-cost ETFs, Equities, Mutual funds, bonds and REITs.
Such platforms give you a wide choice of asset classes to invest and also, there are no surrender penalties or lock-in periods. They are pay as you go accounts with the flexibility of both growth and liquidity.
Indian Mutual Funds for NRI in US Dollar Denomination
Many Indian expats want to participate and benefits from the growth opportunities in India by investing in Mutual funds, but the currency depreciation can be a big deterrent in this case.
Investing in Indian Mutual Funds in US Dollar Denomination can help you mitigate currency risk, as well as achieve good growth on your investment.
Click here to view the top 10 Indian Mutual Funds in US Dollar denomination.
Such investments can be made both on lump-sum investments or regular monthly investments of USD 1,000 and above.
Corporate and Sovereign Bond Mutual Funds and ETF
Sovereign Bonds issued by stable governments(US, Europe, India, China, UAE, Saudi & Qatar) are considered to be safe as the probability of default of a sovereign bond is relatively lower than other bond types. You can invest in a diversified portfolio of Sovereign bonds through Bonds funds via platforms like Saxo Bank and Ardan Investment Trust.
While Sovereign bonds are less volatile, they offer relatively lower returns than Corporate Bonds. You may also consider a portfolio of Corporate bonds
Bucket No 3 - To Achieve Financial Independence
Bucket 3 is the most important but, unfortunately, the most ignored. This strategy is focused on long-term goals with a time of 5 years and above, like
- Saving for retirement
- Saving for Children's Higher Education
- Saving for Migration/ moving back to Home country
- Investing in a Life Insurance ( Term Insurance, Whole of Life or Endowment Plans)
- Saving for Daughter's Marriage
- Legacy Planning
It is not surprising to read many articles on gulf news about people leaving UAE empty-handed after spending many years in Debt.
It happens because people ignore this bucket and focus more on the short-term financial goals and borrowing in case of an emergency.
It is best to invest the biggest portion of your disposable savings into this bucket. Hence 50 - 70% is recommended under this category.
Bucket 3 - Long-Term Investment Options in UAE
- Zurich Wealth Accumulation - Flexible Investment plan - You can start this plan with a minimum investment of USD 30,000 and add additional premiums as a Systematic Investment Plan(SIP) or at your discretion. With this plan, you can build a portfolio of international investment funds helping you beat inflation and grow your wealth.
- Open Architecture - Investment Platforms - Providing a wide range of investment options like Mutual funds, Low cost ETFs, Equities, REIT's and Structured Notes.
- Capital Protected Endowment Plans from LIC International for Retirement, Children's Higher Education and other financial goals.
- Zurich Simple Wealth – the effortless way to invest and build wealth
- Critical Illness Benefit
- Permanent Total disability benefit
- Family Income Benefit
- Accidental Death Benefit
- Hospitalization Benefit
- Dismemberment benefit etc...Zurich Futura - Savings cum Whole of Life Insurance plan. Provides access to a wide range of Investment funds and Strategies to help you Grow Wealth and Protect Loss of Income. It also offers additional benefits like;
- Future Protect from MetLife: is a unique insurance plan with Annuity benefits. It also enables savings for retirement, while protecting the loss of income due to death, disability and critical illness.
Also, Read - How to invest for passive income?
When investing for medium to long term goals, It would be wise to hire an independent financial advisor. They can help you build a Holistic Financial Plan, choose investments aligned to your goals, and manage them efficiently to achieve your goals with ease.
What about you, Are you investing to achieve your short and long-term financial goals?
If not! Why?
What is stopping you?
Are you perturbed? Do not worry...
Arrange a free consultation to discuss investment options helping you achieve your financial goals/needs.