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Monday, November 20, 2023

UAE: I have Dh10,000 to invest, where do I invest to get the most gains?

Dubai: You would have heard this before: “If you start investing for retirement through your first full-time job, your investments grow gradually.” But such advice is still not pretty definite – for instance, let’s say you have Dh10,000 to invest – where would you invest to get the most gains?

“Dh10,000 can give a helpful jolt to your portfolio, whether you started investing last week or you’re close to retirement,” said Brody Dunn, an investment manager at a UAE-based asset advisory firm. “There is an abundance of profitable assets you can invest in today, depending on your goals.”

Money managers are seeing pockets of opportunity with investments ranging from bonds to stocks. For those who want to use exchange-traded funds to invest in these ideas, analysts suggest funds that can serve as good investments, which we will elaborate further below.

The topic we explore first is if Dh10,000 was available for investing, what creative ways would money managers try to put that money to work, beyond traditional investments?

Dh10,000 can give a helpful jolt to your portfolio, whether you started investing last week or you’re close to retirement

– Brody Dunn, an investment manager

1. Mutual funds or exchange-traded funds (ETF)

“Mutual funds and ETFs are some of the most popular investments, and it’s easy to understand why. Choosing your own stocks and bonds can be a major challenge. Unless you’re prepared to monitor the market, it’s almost impossible to know which stocks to invest in,” Dunn added.

“With a mutual fund or ETF, the fund takes care of that for you. All you have to do is choose a fund that aligns with your goals. But most mutual funds require you to invest a minimum, Dh1,000 at the very least. And minimums of Dh3,000 are not uncommon – i.e. 30 per cent of your Dh10,000.”

It’s worth pointing out that there’s a big difference between mutual funds and ETFs. A mutual fund has managers who choose which stocks to invest in. These managers use their knowledge and experience to build a portfolio that they believe will beat the broader market. But what are the risks?

A mutual fund has managers who choose which stocks to invest in. These managers use their knowledge and experience to build a portfolio that they believe will beat the broader market. But what are the risks?

“Minimums make it hard to invest in multiple funds if you’re starting with Dh10,000. Not only that, but mutual funds charge higher investment fees in order to pay their managers. In addition, many funds charge between 1 per cent and 3 per cent of your investment, either upfront or upon the sale of your investment.”

ETFs, on the other hand, are almost always ‘index-based’, meaning they’re built to track a particular list of the top 100 or 500 largest publicly-traded companies. For instance, when you invest in the S&P 500, you’re basically investing in not only the top US companies, but the entire US economy.

“As an ETF invests in index stocks, your investment’s performance will track with the index. So if you’re investing in an index ETF, your investment will increase or decrease at the same rate as the index itself. You’ll never beat the index, but you won’t fall short, either,” added Dunn.

“That said, not all ETFs invest in the S&P 500. You can invest in ETFs that track indexes for developing countries, the energy sector, the financial sector, and all kinds of sectors. In that case, you won’t be tracking with the S&P 500, you’ll be investing in that index.”

ETFs also have no minimum investment and very low trading fees. As a result, you can easily diversify your Dh10,000 investment across several ETFs, which track several industries, regions, and sectors.

As an ETF invests in index stocks, your investment’s performance will track with the index

– Brody Dunn

2. Real estate crowdfunding

“Real estate investment represents an excellent opportunity for long-term growth. You can invest in single-family property developments, large apartment buildings, or even commercial and industrial real estate,” said Mohammed Shaan, another UAE-based wealth advisor.

“With crowdfunding, you don’t have to be rich to invest in a major project. Via a peer-to-peer crowdfunding program, you can look at various properties and choose which one to invest in. These can be new properties or existing properties.”

With crowdfunding programs, some projects may be purchasing properties for the rental income, while others will buy properties, renovate them, and sell them for a profit. There’s sometimes a combination of the two, where investors will renovate a property, rent it out for a time, and sell it for a higher price some time down the road. That said, you also need to be aware of the risks.

ETFs also have no minimum investment and very low trading fees. As a result, you can easily diversify your Dh10,000 investment across several ETFs.

“Real estate tends to increase in value over time, but an individual property can easily lose value. Moreover, you can’t take your money out once it’s been invested. You have to wait for the project to complete and the funds to pay out,” added Shaan.

“In many cases, the timeline of the project is longer than 10 years. Most other investments can be sold whenever you want, so they can serve as emergency savings if you find yourself in financial distress. Also, a lot of crowdfunding platforms restrict their services to high net worth investors.”

Then again, there’s no requirement to limit real estate investment to high net worth investors. Many crowdfunding platforms will let anybody invest, provided they can afford the minimum investment for the project. In some cases, this minimum can be as low as Dh500 or even go as high as Dh5,000 – a half slice of your Dh10,000.

3. Real estate investment trusts (REIT)

“If you like the idea of investing in real estate but are leery of crowdfunding platforms, there’s another option. You can invest in a real estate investment trust (REIT),” added Dunn. “An REIT is similar to a mutual fund.

“However, instead of investing in a swathe of stocks, you’re investing in a selection of real estate properties, most often commercial spaces. Investing in a REIT is also analogous to purchasing a stock. You buy a certain number of shares, which give you an interest in the REIT but not direct ownership of any of the properties.”

The most important advantage of a REIT is the dividend income. REITs are required to pay a minimum of 90 per cent of their annual income in dividends. Across the industry, this works out to an average return of 11.8 per cent per year.

As with any investment, though, different REITs will have different performance, and there’s no such thing as a guaranteed return. Dunn recommends investing around Dh3,000 of your investment savings in REITs.

What to know before you start investing your Dh10,000

“Before you make an investment of any dirham amount, you want to understand your financial goals and priorities. Knowing why you’re investing in the first place will help you stay motivated so that you can eventually reach your goals,” added Shaan.

“To start, define your financial goals. This might include short-term and long-term goals such as saving up for a house, your child’s education, your retirement, or even buying your dream car! Any goal that you might have is valid.”

Shaan further explained that you should create a plan for how you plan to reach those goals, and then select the best investment options that will help you reach those goals in the defined timeframe for each.

“If you have any high-interest debt, such as credit cards or high interest loans, you may want to prioritise paying these off before you begin investing. That’s because the interest on these debts is typically higher than the returns you’d be making off of your investments. Overall, you’d be netting a loss. Come up with a strategy for eliminating your high-interest debt before you start investing.”

Bottom line?

Determining how to invest Dh10,000 comes down to your goals and how much risk you are willing to take on. However, all of these methods are an effective way to manage your money.

“Provided you choose the right method for your current life situation, you can find a lot of success even by investing Dh10,000. So take a leap, invest your money, and put it to work for you,” added Dunn.

Michael Maren
Michael Maren
Former marine biologist who likes to spend as much time in the tropics as possible, due to a horrible time I once had in Alaska. Brrrr.

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