Islamic investors should diversify their portfolios

A diversified portfolio is key for a reader that wants to invest Dh500,00 in a Shariah-compliant manner.

I want to invest Dh500,000 of my hard-earned money but have no clue how and where to invest. Could you suggest a safe and sound way to generate some regular income by investing it according to the Sharia/Islamic way? QM, Abu Dhabi

The expert advice

Shahzad Ali is the head of investment advisory, private banking at ADIB.

The most important principle when investing such a large amount is to invest it in a diversified manner. It is imperative to spread the investment so as to minimise the risk. This is an important rule of investing in a Sharia-compliant manner.

The simplest and safest option is to place your funds in a time deposit, or “wakala”, which is an Islamic financing principle. Money invested in a wakala does not earn interest under Islamic law but is placed in different Sharia-compliant investments and managed on the customer’s behalf, under the agreement.

However, the “profit rate” being offered on wakalas by banks in the UAE is currently quite low (normally less than 1 per cent), so there will not be enough income generated to even meet your Zakat obligations (ie the 2.5 per cent Islamic wealth tax). We expect “profit rates” to remain low for an extended period.

Investors looking for additional income or capital growth can consider two specific asset classes, namely (Sharia-compliant) equities and fixed income instruments (in Islam, these are known as sukuk). Sukuk are offered to investors by issuers, usually banks, corporates but sometimes also governments.

To have an optimal level of diversification and thereby to minimise risk you can also invest in equity and/or sukuk mutual funds. These are “collective investment schemes” which are normally regulated and managed professionally. To focus on income generation, you should invest in the “distributing” rather than the “accumulating” classes of these investments.

Direct investments in both equities and sukuk, on the other hand, can be accessed by opening an equity trading account with a brokerage firm, or by opening a sukuk investment account (at ADIB). However, for the latter a minimum investment of US$200,000 is required per sukuk, meaning that for a sukuk portfolio investors need at least $1m to have a minimum level of diversification.

For equities, focus on companies that are paying dividends but bear in mind that dividends are not guaranteed and depend on the underlying performance of the company. Companies with regular and predictable cash flows are normally the best for predictability of dividends.

An important rule of thumb is to get the asset allocation right. If your priority is regular income and you do not want to take high risks in pursuit of capital gains, then you must look at investing a much larger portion of your capital in sukuk. For example invest Dh400,000 in a sukuk mutual fund and Dh100,000 in an equity mutual fund or individual equities (through a brokerage account).

Whichever way you decide to invest, it is also important to be patient, as investments can go down as well as up, and you will need to carefully monitor how well your investments are performing.

The reader’s advice

Imran Khan, Dubai

Whether you are investing in a Sharia-compliant way or not, you need to make sure you diversify your portfolio and don’t put all your money in one place. I would suggest a mix of property, stocks, commodities such as gold, sukuks as well as keeping an emergency fund in a fixed-deposit account in your Islamic bank. And while earning or paying interest is forbidden under Islamic law, the industry has advanced hugely in recent years, providing you with several options to ensure you invest in a manner that does not go against your beliefs. There are Islamic mortgages to help you invest in property, Islamic loans for those that want to borrow and Islamic investment products. But remember to spread your investments around.

The next money clinic

I want to take out a Dh100,000 loan for my rent and a Dh75,000 car loan for a second-hand car and I keep getting confused by the different interest rates on offer. Some of them are advertised as flat rates and some are advertised as reducing rates. What is the difference and how will that difference affect how much I pay back? SA, Dubai.

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The advice provided in our columns does not constitute legal advice and is provided for information only. Readers are encouraged to seek appropriate independent legal advice

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