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Best investment options in UAE for short, medium, and long term goals
Why Invest your Savings?
Investing your savings helps you grow wealth, beat inflation, and create regular passive income. Just like everything else, UAE offers a multitude of choices when it comes to investing.
While Lumpsum investments help you grow wealth or create passive income, Regular monthly investments help you accumulate capital and grow wealth for important financial goals like retirement or children's higher education. You can invest in the above as a lump sum or as a Regular savings plan/Systematic Investment Plan(SIP) or do a combination of both.
Despite the wide choice and persistent need, many residents are still unsure of investing in UAE, while a few others are overwhelmed with the choice, unsure of where to start.
Benefits of Investing in the UAE
- Wide choice of Investments from all over the world. (USA, India, Europe, MENA, China, etc..)
- Option to invest in your preferred currency like US Dollar, Euro, GBP, etc...
- Wide range of investment options like Stocks, Bonds, ETFs, Mutual Funds, Endowment plans, Pension Plans, Child education plans, and Whole Life Insurance.
- No Capital Gains Tax on Investments
- Mitigate Currency Depreciation risk by investing in a favorable currency like US Dollar( AED is pegged to US Dollar)
- Investments in UAE are easily repatriable
- Well regulated by authorities like UAE Insurance Authority, Central bank, DFSA, ESCA, and others.
- You can continue to hold the investments even after moving out of UAE and manage/ redeem them online
- Nominate beneficiaries on investments to ensure that your wealth is passed on to your loved ones without succession challenges.
How to Invest in UAE?
Before you invest your savings, it is important to understand the following;
Know where you stand with your money
You should start with building an income and expense statement. This helps you record your income and expenses and calculate your monthly investable surplus. You can plan how much wealth you can create by investing your investable surplus over the next 5, 10, 15, or more years.
You may also want to build a Personal Networth statement, helping you determine how much you own and how much you owe.
This statement helps you calculate your net worth and track your progress every year. It also shows you how long you sustain without an income.
Having a proper understanding of your assets and liabilities also helps determine your future financial priorities.
For Eg: If you have too much debt, then you may want to focus on clearing the debt before you invest.
I have seen many people blindly invest in risky assets like Meme stocks and Cryptocurrency even when they are living paycheck to paycheck. In some extreme cases, please people also borrow to invest in such assets.
Eg 2: If most of your investments are in property and you have very few liquid assets, then you may want to invest in liquid assets like stocks or ETFs or vice versa.
Determine where you want to be in the next 5, 10, 15, and 20 years.
Knowing your financial priorities is the key to success. Just like every other life goal, you have a higher chance of achievement if you have them in writing and track your progress.
Determining your investment goals and horizon can help you decide the type of investments you should be considering and your attitude to risk.
Know your risk profile
Knowing how much risk you can take with your investment is crucial before investing your savings. You are very likely to pull out your investment when the value goes down if it is not aligned with your risk profile, thus incurring a loss.
You may fall into one of the following risk profiles;
- Low Risk - You cannot see the value of your portfolio going down. In this case, you should invest in Sovereign bonds, Bank Deposits and Endowment Plans.
- Low - Medium Risk - You can live with 3 - 5% volatility in your portfolio. In this case, you may consider investing 10-20% of your assets in Blue chip equity funds in the developed markets
- Medium Risk - You are familiar with market-linked assets and are comfortable accepting 5-15% volatility in your portfolio.
- Medium-High Risk - You are much more familiar with market-linked assets and are comfortable accepting 15-20% volatility in your portfolio.
- High Risk - You are a sophisticated investor with many years of investment experience in market-linked assets and are comfortable accepting 20-40% volatility in your portfolio.
Once you have a grip on the above aspects you can look to invest your savings using the following approach.
3 Bucket Investment Approach?
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 fulfill 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.
People with adequate emergency savings have always felt financially secure.
Particularly in these difficult times, when the coronavirus pandemic is still far from over, people with adequate emergency savings are less stressed about finances than those who don't have adequate emergency savings. They are more confident of weathering this storm without much difficulty.
In fact, people with more than adequate savings were able to make the best of the property and stock market downturn in 2020 and were able to buy quality assets at much cheaper prices.
The purpose of this bucket is to help you Achieve Financial Security, and 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 funds 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 meager (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.
Best Investment options for Short-Term Goals
Investing in National Bonds is a good idea considering the safety, liquidity, and a slightly better return on investment.
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 most prominent digital bank in the UAE, pays up to 1.50% Pa interest on your goal accounts.
3. FCNR Deposits for NRI
Foreign Currency Non-Repatriable are fixed deposit accounts in the US Dollars and a choice of other foreign currencies. Based on your travel and immigration needs, you can save in these accounts for periods ranging from 1 year to 5 years.
In an 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
Best Investment options for Medium-Term Goals
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 2019. Given that global equity valuations are high, It can be a safe haven when other asset classes are 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
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 ex-pats want to participate and benefit from the growth opportunities in India by investing in Mutual funds. Still, currency depreciation can be a significant deterrent in this case.
Investing in Indian Mutual Funds in US Dollar Denomination can help you mitigate currency risk and achieve good growth on your investment.
Click here to view the top 10 Indian Mutual Funds in the 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 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 or financial freedom
- Saving for Children's Higher Education
- Saving for Migration/ moving back to Home country
- Investing in a Life Insurance ( Term Insurance, Whole 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 short-term financial goals and borrowing in case of an emergency.
It is best to invest a considerable portion of your disposable savings into this bucket. Hence 50 - 70% of your savings are recommended under this category.
Best Investment options for Long-Term Goals
Open Architecture - Investment PlatformsSaxo Bank, Ardan Investment Platform & StockAl Investment Platform are a few platforms that provide access to a wide range of investment options like Mutual funds, Low-cost ETFs, Equities, REITs, and Structured Notes.
Regular Savings Plans or Systematic Investment Plans
Leading providers like Zurich, MetLife, Salama, Investors Trust, Oman Insurance, and Orient provide such plans. They are ideal for accumulating capital and building long-term wealth using regular monthly savings.
Capital Protected Endowment Plans from LIC Internationalfor Retirement, Children's Higher Education, and other financial goals.
Zurich Simple Wealth, as the name suggests is a simple & straightforward lump-sum investment plan helping you grow your Wealth.
It is ideal for both beginners and seasoned investors looking to invest for short, medium, or long-term goals.
Life insurance can be much more than providing money for your family money in your absence.
Futura is a Flexible, Whole Life Insurance policy providing life cover, living benefits, and cash surrender value to complement your retirement savings.
Future Protect from MetLife:This 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 the 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 to help you achieve your financial goals/needs.
Author, Blogger & Independent Financial Advisor. My goal is to give you actionable tools for creating passive income and building wealth. More than 10,000 expats have already used my ideas to jumpstart their journey towards financial independence. Connect with me to start yours...