As several people in the UAE are losing jobs or moving between jobs, they are receiving end-of-service dues from their employers. While it is typical of most UAE residents to spend their end-of-service dues, financial advisors warn them to save it instead.
However, where you invest it depends on your age and risk appetite. But before anything else, financial advisors suggest that people must have three to six months’ worth of living expenses in a savings account before they decide to invest. If you don’t have that, focus on setting aside that amount first. People should also look at investment only if they have zero debt.
In most developed countries globally, people tend to spend their end-of-service payments to settle their credit card debt. Personal finance experts advise people to live within their means rather than overspend.
Which asset classes to invest in
- Exchange traded funds
- Real estate
- Fixed deposits
Which asset classes to avoid
- New business
Not sufficient to fund retirement
Moreover, in the UAE, the gratuity amount is usually not sizeable enough for people to look at it as a pension fund. They should only use gratuity to add to their pension fund. For instance, the DIFC Authority has recently launched a workplace savings scheme where companies put employees’ gratuity payment into a fund every month. Employees also have the option to add to that fund, thereby creating a pseudo pension fund.
Unless a person has worked for the same company for his entire working life, it is hard to sustain their retirement with only end-of-service dues
– Vijay Valecha, Chief Investment Officer, Century Financial
“Unless a person has worked for the same company for his entire working life, it is hard to sustain their retirement with only end-of-service dues. Gratuity should be looked at just a savings account. End-of-service payment is not the biggest payment you will receive in your lifetime. People in their 20s and 30s must have a plan for their retirement rather than waiting to be in their 50s and then start planning it,” said Vijay Valecha, Chief Investment Officer, Century Financial.
First, consider what age you are getting your end-of-service benefits. Anybody with the potential of high future earnings should look at equities as a major asset class to invest in, especially since markets are down now, he advised. However, anyone who is not sure of their income potential in the near future or nearing retirement must consider investing in fixed income or capital protection kind of schemes. “Those about to retire must also invest in fixed deposits in the country they are looking to retire in,” Valecha suggested.
Decline experienced by major global indices since market highs
When markets panic, it is usually a good time to invest in equities and bonds since pockets of opportunity emerge and prices are attractive. Today, the equity markets and major global indices are down 30 percent from their highs.
If you are in your early 20s and 30s and want to invest your gratuity payment, look at equities and commodities, which are very volatile but also high-reward instruments. “Invest in oil right now because prices are down. Those investing in equities must consider companies like Uber and Netflix which have value stocks. They can also consider investing in growth stocks like Snapchat and Twitter,” said the investment advisor.
Meanwhile, if you have hit the retirement age in the UAE and received your gratuity, consider investing the funds in stable companies like Google, Microsoft or Apple which has a steady dividend flow of 4 to 5 percent. “You can also invest in oil but not directly, rather through companies like Chevron, Exon or Schlumberger which are expected to survive this crisis. They offer dividend of 7 to 7.5 percent,” informed Valecha.
Add real estate to your portfolio
Personal finance experts also suggest that real estate must be a part of your retirement portfolio. You are advised to first invest in real estate in the region you plan to retire in so that you can live in it once you retire. After that, look at real estate investments that offer high yields.
“Dubai offers 5.5 percent net rental yield. Investors can buy smaller units like studio or 1-bedroom apartments in Dubai since they are easier to rent out. Spain and Italy also offer a 5 percent rental yield. The only risk is the currency since the euro has been depreciating and is expected to do so further. But anyone in real estate needs to have a 20-year investment horizon. Anyone with a positive long-term outlook must invest in European real estate,” advised Valecha.
Net rental yield available on Dubai real estate
Be wary of gold
However, the finance expert is wary of investing your end-of-service dues into gold. Since gold has not outperformed any other asset class since 2014, it can only be used as a tool for hedging during times of volatility. “Use gold to diversify your portfolio in times of turmoil. Gold does not give you good returns. The yellow metal can fall as much as equities. So, it is not a very safe investment option,” he explained.
Valecha completely ruled out the option of channelling end-of-service payments into bitcoin and other cryptocurrencies. “Anyone with a very, very stable source of income can look to invest in cryptocurrencies. But anyone who is receiving their end-of-service dues and with multiple job prospects should not be looking to invest in cryptocurrencies.”
People can also consider investing their end-of-service dues in the bonds market. If you are close to retirement, consider A or AA-rated bonds. “Depending on your age and risk appetite, you can decide to invest in AAA-rated bonds, BBB-rated bonds or junk bonds. High-yielding bonds which are investment grade offer 8 to 9 percent,” advised Valecha.
Depending on your age and risk appetite, you can decide to invest in AAA-rated bonds, BBB-rated bonds or junk bonds
– Vijay Valecha
Several expats in the UAE choose to remit their end-of-service dues to their home country where it is put into fixed deposits (FD). However, the majority of UAE expats are from India, Pakistan and Bangladesh and their currency is depreciating every year. “The value of money will keep depreciating over a long period of time. Fixed deposit rates do not cover currency depreciation. Putting money in a dollar FD will fare better than putting it in an FD in your home currency in India or Pakistan,” the investment advisor cautioned.
ETFs are a safe bet
You can also invest your gratuity dues in exchange-traded funds (ETFs). There are ETFs based on oil which are highly volatile and there are conservative ones as well. “There is always an ETF suitable for all investor needs. When someone is retiring, they should be looking at stocks that yield high dividend. There are very secure ETFs that yield high dividends that follow companies like Apple, Microsoft, Berkshire Hathaway, etc. If you are in your 20s and 30s, you can invest in ETFs that take a leverage on the S&P 500, or based on the new tech sector,” said Valecha.
A lot of people who lose jobs also tend to invest their gratuity amount into a new business. But this is a high-risk option.
What to watch out for
“Never look at a short-term investment. In a long-term investment, watch out for recurring charges. There are a lot of funds that have a recurring charge every quarter or every year even if you are holding the asset for 5 to 10 years. A one-time charge might be much smaller than the recurring charge,” Vijay Valecha informed.