What to do with that lump sum? Here are some of the options

Investing a smaller nest egg requires savers to fully understand their appetite for risk and how much spare cash they actually have.

Many of us have a lump sum of cash savings that we don’t know what to do with. Generally it’s a number big enough for you not to ignore, but not big enough to be taken seriously by any private banker.

So you’re left alone trying to make your money work for you. Let’s say you have Dh100,000 stashed away. This money can accumulate in your salary account over time but couple a minimal return with rising prices in the UAE and that savings pot will be worth less every year.

The value of your cash is actually decreasing at the level of inflation (around 2.5 per cent in the UAE today). That means you can buy 2.5 per cent less this year with exactly the same amount of cash than you could last year.

So what are your options? It all depends on the level of appetite you have for risk. How much risk are you prepared to take with your money and how quickly do you need access to your cash? The higher the risk, the higher the return.

If this Dh100,000 is your only cash reserve, you should aim for safe and “liquid” options you can release immediately without losing much value. If you have other liquid reserves you can separately tap into, you can now consider some longer-term, less liquid and riskier options.

Safe savings option

For the safe option – low returns, but peace of mind – the best place to put your money is in a savings or deposit account. Low risk will bring low returns; the savings and deposit accounts listed for the UAE on Souqalmal.com show interest rates varying from 0 per cent to around 1.5 per cent.

Higher rates such as 5 per cent can be obtained - but these are usually “step-up” accounts, where the 5 per cent applies only on the last month of the period of the fixed deposit.

The advantage of a savings account is that you can access your money at any time in an emergency. You can also do so with a fixed deposit – but this would mean sacrificing the rates originally applied.

Government/ corporate bonds

One level of risk higher is to buy bonds. You can either go with government bonds or corporate bonds.

The risk, and therefore the return, depends on the creditworthiness of the party you’re lending to – that is, either the country or the company issuing the debt.

When buying bonds, you also have to look at the purchase price (are you buying at the market value, above or below it?) and the frequency of the “coupon” payment. The average return on a bond is between 4 and 6 per cent.

Two other risk factors to consider are, firstly, currency fluctuations if buying in any currency other than the US dollar, which the dirham is pegged to. If you are buying euro bonds, there is an additional risk – or upside – in currency variations. Secondly, there are trading costs involved in buying and selling bonds, and the cost of each transaction depends on the channel you are using.

The stock market

If you can handle short-term volatility, buying stocks may be for you. You’ll need to stay on top of economic news, stock market trends and analysis.

You can trade on the Dubai Stock Exchange or an international stock exchange, depending on where you are most comfortable. And you can trade through a stockbroker, who may give you advice and analysis, or do your own trading through online platforms. Returns on stocks vary significantly depending on the economic environment and the risks you have taken.

The Dubai Financial Market has increased 49 per cent to date in 2014, but it still goes through ups and downs – like any market.

Worldwide, markets are up this year thanks to the global economic recovery. If you do not want to choose individual stocks, you can invest into mutual funds where you will be investing in a diversified basket of stocks. Remember, there are trading costs and currency risks involved.

Early seed investment in a start-up

If you are an entrepreneur at heart but never managed to start your own business, you can become an angel investor and provide advice to the founder. This is one of the ways you can get involved without quitting your job and taking the full risk.

However, this is a very risky place to put your money so make sure you do your due diligence on the company and the founder. Angel investments can be of virtually any amount, depending on the venture’s needs.

Ambareen Musa is the founder and chief executive of Souqalmal.com

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