Expert Guidance for Low-Risk Fixed Income Investing

Investing for many people can be intimidating and confusing. This article will provide a basic overview of how to start investing, what are the safest types of investments, and why you should consider investing in small and medium enterprises (SMEs).

Essential steps to follow before getting started your investment 

1. Determine your financial goals

Before you start investing, it is important to determine your financial goals and the timeline in which you want to achieve them. This will help you determine the type of investments that best suit your needs.

2. Evaluate your risk tolerance

Different investments carry different levels of risk. You should evaluate your risk tolerance and determine how much risk you are comfortable taking on.

3. Educate yourself

Investing requires knowledge and understanding. You can learn about investing by reading books, and articles, or watching reliable Youtube videos. 

low-risk and safe investments

Fixed deposits are low-risk investments that offer a guaranteed return on your money. Given the return is guaranteed, they’re lower than other riskier investments.

One of the most basic principles of investing is higher risk equals higher return and vice versa. 

What are the different types  of low-risk investments?

1.Government bonds

These are fixed-income securities that are very low risk as they are sovereign-backed.

2.Corporate bonds

they are issued by companies and offer a higher return than Government bonds. They are considered to be a safe investment, but there is a higher risk involved compared to Government bonds.

The caveat with government and corporate bonds they are not shariah compliant. Fortunately, there are Sharia-compliant alternatives (Sukuk) that have similar risk/return profiles to bonds. We will soon be posting a blog that dives deeply on Sukuk, stay tuned! 

What Limitations are Associated with Safe Investments?

• Low returns: One of the main limitation of these safe investments is that they typically offer low returns. With savings accounts, for example, the interest rate is often low, and may not even keep up with inflation.
  
  

• Lack of diversity: Safe investments tend to be limited in terms of available types. For example, savings accounts and certificates of deposit (CD) only offer a single type of investment, which can make it difficult to diversify your portfolio.
  
  

• Inflexibility: Safe investments, such as CDs, often come with penalties for early withdrawal. This lack of flexibility can make it difficult to access your funds if you need them for an unexpected expense.
  
  

• Inflation risk: The low returns offered by safe investments may not keep up with inflation, which can erode the purchasing power of your money over time.
  
  

Why should you consider a slightly higher risk by investing in SME finance?

• Diversification
  
  Financing SMEs is an alternative asset class that can help diversify your portfolio, reducing your overall risk.
• 
  Support for local communities
  
  Investing in SMEs helps support local communities and economies, leading to positive social and economic outcomes.
  
  

Investing in SME Financing 2024 Insights

SMEs in Saudi Arabia

• According to the Small and Medium Enterprises General Authority (Monshaat), SMEs make up 99.5% of the total businesses in the kingdom and contribute to about 20% of the country's gross domestic product (GDP).
  
  

• Saudi’s Vision 2030 aimed at promoting entrepreneurship and the growth of SMEs in the country with the hope of increasing their contribution to GDP from 20% to 35% by 2030..
  
  

SMEs in United Arab Emirates

• The Dubai SME, the agency responsible for promoting SMEs in Dubai, reports that SMEs make up 95% of the total businesses in Dubai and contribute to about 43% of the total employment in the emirate.
  
  

• The UAE government has launched several initiatives aimed at supporting the growth of SMEs, including the Dubai SME 100,
  
  which recognizes the top 100 SMEs in the emirate, and the Young Entrepreneurs Competition, which supports young entrepreneurs to start their own businesses.

Globally

• According to data from the Small Business Administration, small businesses make up 99.9% of all businesses in the US and employ over 47% of the private sector workforce. Investing in SMEs can be a smart way to grow your wealth while also making a positive impact on local communities and economies.

• According to the World Bank, SMEs contribute to 50% of employment and 40% of GDP in developing countries.

Conclusion

Investing is a proven way to grow your wealth over time. Fortunately, there are many different types of investments for us to choose from,

so by determining your financial goals, evaluating your risk tolerance and  educating yourself,

you can find out what type of investment suits you most. And remember, the earlier you start the more time you give your wealth to grow. 

Image Credit: Photo by Didier Weemaels on Unsplash

Disclamer:
The post is for educational purposes only and the Firm does not directly or indirectly provide these services. Funding Souq KSA is regulated by the Saudi Central Bank (SAMA). This communication is not directed at or intended to be acted upon by any Person in the DIFC.