Events of the past year have underscored the need for UAE residents to have emergency funds and personal savings accounts. When times get tough, the tough have money saved away.
The easiest way to build up those savings is by putting small amounts of money away on a regular basis. If you ever had a little money box as a child, you’ll know how quickly money adds up. An amount that seems insignificant in isolation can grow into a significant sum over time with regular deposits.
The grown-up equivalent of that money box is a Systematic Investment Plan (SIP), where you make recurring payments at regular intervals to purchase shares in a mutual fund or other fractional asset classes. Such payments are made on a weekly, monthly, or quarterly basis and can be small amounts that are easier to set aside than the large lump sums that would otherwise be required.
To understand how SIPs can benefit investors in the UAE, we need to look at a strategy called dollar-cost averaging (DCA). When you make recurring SIP investments, they average out the cost of the investment over the course of its tenure.
By putting the same dollar (or dirham) amount into a security regularly, shares or units are purchased at varying prices and in different amounts each time. Therefore, an investor may buy more shares when prices fall and fewer units when prices rise. As an automated strategy, DCA works in investors’ favor by reducing the impact of price volatility, and with it, an investor’s risk. The average cost of the investment decreases over time and the process cuts out the emotions associated with market highs and lows. SIP approaches therefore suit all levels of investors.
For investors, there are many benefits to choosing a SIP approach, particularly when it comes to investing in mutual funds.
Automatic investments: Perhaps the biggest advantage to taking out a SIP is that there’s little more to do than deciding your preferred asset or instrument, how much you want to invest and the frequency at which you want to make that investment. Typically, SIPs in the UAE are funded through direct debits, so you just need to make sure there’s enough money in your account on the date the investment goes out. In that sense, the investment becomes automated.
Get started with small amounts: With a SIP, regularity matters more than the amount of each individual payment. Many plans begin with investments as low as $100, but this varies according to the plan and the financial institution.
Build financial discipline: SIPs can help investors in the UAE develop the habit of saving over a sustained period without the need to track market movements or worry about share prices.
Lower overall cost of investments: Statistics indicate that you will usually arrive at a lower average cost per unit than if you were to invest large amounts sporadically – again, because DCA makes market volatility work for you.
Reduced investment risk: Buying at regular intervals can help reduce risks associated with one-off market entries – such as may occur when prices drop substantially within a few weeks of making a lump sum equity purchase. When the same investment is spread over several weeks or months, the price averages out, minimizing the potential impact of sudden movements.