A mutual fund holds securities like stocks, bonds, money market instruments or other assets. These collections are called “portfolios.” Mutual funds can be distinguished by their basic investing styles, categorized by the Investment Company Institute (ICI). An example would be a stock mutual fund or a bond mutual fund. A mutual fund may also specialize in a particular type of security, such as government securities or corporate bonds. It can even pursue strategies not usually allowed for individual investors, such as short selling and leverage.
UAE mutual funds are top-rated among investors. It is especially true in the UAE because the banking sector has been booming for years. Even though there have not been many problems with banks or financial institutions in Dubai or other emirates, people tend to invest in mutual funds anyway because they feel safer this way.
However, it might be wiser to consider whether mutual funds honestly give you a safe investment before you go and put all your money into one of these products. Mutual funds do indeed offer protection against certain kinds of risk and allow you to diversify your portfolio – but they also come with various kinds of fees and risks associated with them. Their safety depends on how you handle them.
How can you ensure there is as little risk involved as possible?
Diversification
Diversification is among the popular ways to make your mutual funds as safe as possible. It is the first thing you should do when deciding what kind of investments you want to put your money into. It will depend on what you are looking for in return and risk tolerance. Once you have decided on that, ensure that the investment products offered by the mutual fund include these types of securities or assets to be diversified across different industries and market sectors to minimize risk.
Watch Out for Fees
Fees associated with your mutual stocks come in two primary forms – management fees and operating expenses. The management fee is paid annually to the company managing the fund, while operating expenses include legal costs, transaction fees, etc. These expenses are deducted from the fund’s assets every year. While management fees are typically negligible, operating expenses can range anywhere from 0.1% to 1% of assets under management (AUM). The more expensive the fund is, the higher these costs are likely to be, which equals more risk for you as an investor because there will be less money left over to make profits after deducting operating expenses.
Keep Track
The mutual funds market in Dubai has always been a fast-moving one with lots of new products introduced regularly. If something does go wrong in one place, while diversification does help to reduce risk, your entire investment could be affected because you now have many different stocks in the same industry. You can avoid this by designing a watch list that monitors your investments. Watch lists are typically set up to track prices every day at specific times throughout the trading day and will alert you if any security falls below or above certain pre-determined price levels.
Look at Growing Companies
Another way to reduce risk is to select mutual funds with companies or industries showing growth potential or growing fast enough for you not to depend on dividend income from the company. If you choose this method, make sure to diversify further among different sectors like technology, automotive, etc. There’s less risk of losing your money if one growth sector fails or slows down.
Keep Cash Reserves
Finally, mutual funds are not the only option available to you when thinking of reducing risk in your investment portfolio. You can also keep a cash reserve that will ensure that even if the entire stock market crashes and nothing is worth investing in money-wise, there will be some cash value left out of your initial investment. This would help you get through the crisis and give you time to find better investment opportunities later on.
