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Decoding Investment Funds in the UAE

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  | Published: 05 February 2020 | Last Updated On: 19 January 2021

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Smartest investment and life plans in UAE

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UAE is one of the most rapidly developing economies in the Gulf. It has been ranked 4rth in the list of best career and investment destinations globally. The geographical location of UAE offers a unique blend of cultures, traditions, customs and cuisines that bridges the gap between eastern and western parts of the world.

Dubai, particularly in the UAE, has emerged as a global business hub that attracts investors from all across the world. Dubai offers a variety of options to invest money in the UAE via different investment tools. Investment funds in the UAE are one of the most popular investment tools available in the market.

An investment fund is a collective investment tool where multiple participants allocate a portion of their money together to invest in funds that are managed by investment companies. Investment companies invest money in UAE in equity shares, bonds, ETFs and other financial tools to earn a profit.  

What are Investment Funds?

An investment fund is a capital belonging to multiple investors that are used to collectively buy securities where each investor holds ownership and control over their shares. Investment funds provide a wide selection of options to invest money in the UAE. Investment funds offer better management expertise and a lower cost of investment than other forms of financial investments. Investments funds are categorized into open-end funds and closed-end funds which are further categorized into mutual funds, money market funds and hedge funds.

Investment funds come with assistance from a fund manager hence investors do not decide the way fund’s assets are invested. A fund manager observes and analyzes the fund and suggests which securities the fund should and in what quantity the security should be purchased and sold.

Unlike conventional bank deposits that offer fixed rates of interest, investment funds have no fixed return rates as they are subject to market risks. The rate of returns in case of investment funds depends upon the change in the value of securities and other assets. With an increase in the value of securities the rate of return also increases.

Types of Investment Funds

Investment funds in the UAE are regulated under Decision no. (9/RM) of 2016 and are mainly categorized into two categories.  

Open-end funds

Open-end funds constitute the majority of the investment funds in the UAE. In the case of open-end funds, new shares are issued as investors add value to the investment pool and retire shares that have been redeemed by the investors. The pricing of open-end funds is done once at the end of the trading day.

Open-end investment funds in the UAE are investment tools that allow investors to enter or exit the fund any time after their launch. These funds are not traded in the open market and their net asset value or (NAV) changes every day due to fluctuations in the market. Open-end investment funds in UAE are sold based on their NAV which typically depends on the value of securities associated with the funds.

Investing in open-end funds allows investors to track the performance of their fund periodically and therefore investing in an open-end fund is a wise decision. Open-end funds use the SIP approach of investment and hence turn out to be a suitable investment option for salaried investors. Open-end funds are easy to liquidate assets and allow investors to redeem units as per their convenience.

Although open-end investments manage to maintain a diverse portfolio, they are still subject to market swings and fluctuations. The NAV of these funds is highly dynamic and fluctuates frequently. Fund managers are experts who are qualified and experienced in the field of fund management, they are appointed to make all financial decisions related to the securities of the fund.

Closed-end funds

Closed-end funds are traded similar to open-end funds. Closed-end funds are an investment that issue fixed shares and are traded on the stock exchange. Funds are traded based on the supply and demand of the investor. Hence, closed-end funds are often traded at a discount to its Net Asset Value.

Closed-end funds are similar to an exchange-traded fund (ETF) rather than a mutual fund. These funds are issued to raise money and then traded in the open market, similar to stocks in a stock exchange. Units of these funds are bought and sold via a broker that charges a small commission. Closed-end funds have a fixed maturity period and are often traded at a discounted value to their NAV.

In the case of closed-end funds, investors are allowed to redeem units after a pre-defined period when the fund matures this provides fund managers ample time to analyze and formulate an investment strategy. Closed-end investment funds are traded on stock exchanges similar to an equity share that allows investors to buy and sell units on prices lower than their actual NAV.

Closed-end funds require an investment of lump-sum amount at the time of launch. The majority of salaried investors find it difficult to afford lump sum investments and prefer the SIP approach used in case of open-end funds. Unlike open-end funds where investors can analyze the performance of the fund in the past closed-end funds have no track record that reveals their performance.

Hedge Funds

Hedge funds are another type of investment fund that uses pooled funds from multiple investors to invest in a wide variety of assets that are usually accompanied by complicated portfolio and risk mitigation techniques. The name ‘Hedge Funds’ comes from the usage of complex risk management techniques to ‘hedge’ risks and provide optimum returns.

A hedge fund is a combination of asset classes like bonds, currencies, equities and convertible securities that strive to hedge risks arising due to market swings. Unlike mutual funds, the use of leverage in the case of hedge funds is not capped by the regulators and hence they are also called alternative investments.

Money Market Funds

Money market funds are a type of investment funds in UAE that allows investment only in liquid assets with a short-term maturity period i.e. less than 13 months. These funds are typically used to manage short-term cash requirements and hence offer high levels of liquidity with low levels of risk. Money market funds deal only in liquid assets like cash or cash equivalents. The primary objective of investing in a money market fund is to diversify an investor’s portfolio and minimize the fluctuations in the NAV.

Conclusion

Investment funds in the UAE are diverse investment tools that include a variety of funds categorized mainly into open and closed-end funds. Closed-end funds are launched via IPO and are sold in the open market whereas open-end funds use the SIP approach and are sold based on their NAV.

It is very difficult to conclude that which type of investment fund is better, the performance and the returns offered by a fund are dependent on factors like investment style, long and short term goals of the investor, techniques of fund management and risk mitigation.