How to profit in the UAE from a lump sum of money

When Gareth Hughes, a British citizen, moved to Dubai two years ago, his savings were earning a pitiful rate of interest.

Then he met Richard Taylor, the senior wealth manager with Professional Investment Consultants in Dubai, who advised making the money work harder and recommended investing a single lump sum in an offshore bond from Zurich International.

Mr Hughes, who works as a business development manager for Gunnebo Middle East, opted to invest over a five-year term - with a hoped-for return of 7 per cent per year – to match his anticipated stay in the UAE. “Locking the money away also prevents me from blowing it living the Dubai lifestyle. Now I want to save as much as I can, so it’s there when I need it in future.”

Deciding on the best place to invest a lump sum can be a problem, but it’s a nice problem to have. If you’ve got cash in the bank, or have just received a windfall such as a bonus, inheritance, or profits from a property sale, here are some options:

US$5,000

The best way to put this sum to work is to pay down any outstanding credit cards, debts or loans, says James Thomas, the regional director at Acuma Wealth Management in Dubai. “These charge higher rates of interest than you can expect to generate from your investments, so it makes sense to pay them off first. Just check you won’t have to pay any early surrender fees.”

Next, consider setting up a cash reserve for financial emergencies.

“Any money left in cash won’t earn much interest but it can be a lifeline if you have a sudden, unexpected expense,” Mr Thomas says.

If you are free to invest all of the cash, you have to ask yourself a few questions. “How long are you looking to invest for? Do you need access to the money? Why are you investing? How much risk are you willing to take?”

If you need the money in the next three years or so, keep it safely in the bank, rather than taking a chance on the stock market, Mr Thomas advises.

Your choice of offshore accounts may be limited, because many offshore banks set a minimum deposit of $10,000, although others set their benchmark at $5,000.

HSBC’s Online Bonus Saver Account, for example, pays 0.1 per cent plus a 0.55 per cent bonus on months when you don’t make a withdrawal, taking the total return to 0.65 per cent. Minimum balance is $5,000.

Those that want to deposit their money locally could consider a fixed-deposit account, with some UAE banks offering returns of up to 5 per cent that accelerate over time (see Three of the Best on b9).

Alternatively, National Bonds, a Sharia-compliant investment scheme, offers annual profit rates on bond holdings.

The profit rate for 2012 was on the lower side at 1.5 per cent but bondholders can win cash prizes ranging from Dh50 to Dh1 million, as well as cars and gold to boost their returns further.

You will need a lot more than $5,000, however, if you’re saving for a major goal, such as a property deposit or retirement.

$50,000

You have more options if you have this amount to invest. But again, you should start by paying down expensive short-term debt such as credit cards and loans, says Chris Ferguson, the managing director (UAE) at Guardian Wealth Management.

“You should then look at your future financial milestones, such as marriage, buying a home, setting up a business, your children’s education or retirement. Look at what you might need the cash for, and when you will need it. That will help you decide where to invest.”

If any of those milestones are looming in the next two or three years, again, stick to cash. Stock markets are just too risky over short periods, Mr Ferguson says.

Expatriates can get a slightly better rate of interest by locking the money away in a fixed-term offshore savings bond. The Lloyds Bank Fixed Term Deposit account, for example, pays 1.1 per cent on £10,000 and above, 0.75 per cent on $10,000, and 0.3 per cent on €10,000 (Dh50,500). Maximum balance is either $5 million, £5m or €5m.

If you’re investing for the longer term, say, five years or more, then you should tap into the greater returns generated by the stock market, Mr Ferguson says.

He recommends building a balanced portfolio of investments covering the major asset classes, stocks and shares, bonds and property. “Use low-cost investments that offer greater value for money, such as index-tracking funds and exchange traded funds (ETFs). These often outperform more expensive mutual funds, and have much lower charges,” he says.

ETFs are traded like stocks and shares, have no initial charges and low annual fees averaging just 0.5 per cent. By comparison, mutual funds charge up to 5 per cent initially and 1.5 per cent every year after that, eating away at your returns.

Popular ETFs include the iShares FTSE 100, which tracks the London stock market, the SPDR S&P 500, which tracks major companies in the United States, and Vanguard European.

You also have to review your portfolio regularly, to make sure it still matches your attitude to risk, Mr Ferguson says.

$500,000

With wealth comes responsibility, and you don’t want to take too many risks when investing $500,000, says Steve Gregory, the managing partner at Holborn Assets in Dubai.

“Where you put your money depends on your attitude to risk, and whether you’re a cautious, medium-risk or aggressive investor.”

You need to spread your money across a range of assets that behave in different ways at different times, and aren’t all correlated to stock markets, he advises.

Stocks and shares offer higher potential returns, but with higher risks. Bond funds, also known as fixed-income funds, should offer a higher return than cash, but with less risk than shares.

Multi-asset funds are an increasingly popular option. They invest across a range of different asset classes, such as shares, bonds and cash, and adjust exposure to them in line with market movements. They can work as a one-stop shop for investors.

With thousands of funds to choose from, you may need to take specialist wealth management advice. For those that like to keep things simple by investing in a multi-asset fund, he recommends WSP Global Strategy Alpha Portfolio and the Harmony Balanced Growth Portfolio.

You also have to decide which currency you want your funds to be denominated in. This may be the currency of the country you plan to move to next, or more likely, to retire in. Or you may prefer a spread of currencies, to balance risk, and help to keep your options open.

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