There are many kinds of mutual funds, and some are riskier than others and they are accordingly categorized into various types. This article covers all you need to know about mutual funds in UAE, their types, why you should invest, and how to get started.
Mutual funds are popular among investors who don't want to pick and choose individual investments themselves but want to benefit from the stock market's historically high average annual returns.
To start investing in mutual funds in UAE, make sure you have enough money deposited in your investment account. Keep in mind that mutual funds may have higher investment minimums than other asset classes. Other investments, like individual stocks or ETFs, generally do not have these kinds of minimums.
You can also buy ETFs and stocks at any time during the trading day.
How to Invest in Mutual Funds in UAE
If you're ready to trade and invest in mutual funds, here is our step-by-step guide on how to buy them.
- Research mutual funds: once you’ve identified your mutual fund investing goals, you can pick funds with the right investment strategy tailored to your goals and then refine your list of mutual fund choices.
- Decide where to buy mutual funds: most investors opt to buy mutual funds through an online brokerage, many of which offer a broad selection of funds across a range of fund companies.
- Manage your portfolio: once you determine the mutual funds you want to buy, one move would be to rebalance your portfolio periodically, with the goal of keeping it in line with your diversification plan.
With CAPEX.com you can trade and buy shares in the ETF version of the largest mutual funds in the world, including the iShares MSCI UAE ETF, which only costs the price of one share. ETFs are traded like stocks, and you can do things with them you can't do with mutual funds, including shorting them, and buying them on margin.
What are Mutual Funds?
A mutual fund is a type of investment vehicle consisting of a portfolio of stocks, bonds, or other securities. Mutual funds can help small or individual investors build more diversified portfolios than most people could build on their own. Mutual funds are typically managed by a professional who selects the investments, although passively managed index funds have become more popular.
A mutual fund effectively owns a portfolio of investments that is funded by all the investors who have purchased shares in the fund. So, when an individual buys into a mutual fund, they gain part-ownership of all the underlying assets that the fund owns - hence the “mutual” in mutual funds.
Mutual funds in their present form have been around for almost a century, with the first mutual fund launched in 1924. The annual fees, expense ratios, or commissions charged, may affect their overall returns.
Currently, a few companies dominate the domestic mutual fund market: Vanguard with over $6 trillion of mutual fund assets under management (AUM), and Blackrock and Fidelity with over $2 trillion of AUM. All offer very robust funds with high growth potential and have trillions under their belt in total assets.
Active vs Passive Mutual Funds
Whether a mutual fund is actively or passively managed will determine its fees and performance.
Funds with passive management make investments to match a particular benchmark. They usually don't need professional management because they aim to replicate the performance of a market index, such as the USA 500, USA 30, US Tech 100, UK 100, or Germany 40. Because of the decreased overhead for the fund, passive mutual funds sometimes have cheaper fees than actively managed funds.
Here are two types of mutual funds popular for passive investing:
Index funds are made up of stocks or bonds that are listed on a particular index, so the risk aims to mirror the risk of that index, as do the returns. If you own a given index fund and you hear that it was up 3% for the day, that means your index fund should be up about that much, too. Exchange-traded funds (ETFs) can be traded like individual stocks but offer the diversification benefits of mutual funds. In many cases, ETFs will have a lower minimum investment than index funds. ETFs may be more tax-efficient than index funds. How to trade and invest in indexes How to trade and invest in ETFs
Actively managed funds have a professional manager or management team making decisions about how to invest the fund's money. Often, they try to outperform the market or a benchmark index, but studies have shown passive investing strategies often deliver better returns.
Mutual Fund's Income
Dividends and capital gains are the two types of income produced by mutual funds. Although a fund is required to distribute its net income to shareholders on a yearly basis, the frequency of distributions varies greatly throughout funds.
Funds that concentrate on growth stocks and employ a buy-and-hold strategy are ideal if your goal is long-term wealth building rather than short-term income generation. This is because these funds typically have fewer expenses and a smaller tax effect than other fund types.
Dividend-bearing funds, on the other hand, are a great option if you want to use your investment to generate a regular income. These funds pay dividends at least once a year, but more frequently on a quarterly or semi-annual basis. They invest in a range of interest-bearing bonds and stocks. Despite being riskier, stock-heavy balanced funds are available in a variety of stock-to-bond ratios.
Types of Mutual Funds
There are several types of mutual funds available for investment, though most mutual funds fall into one of four main categories which include stock funds, money market funds, bond funds, and multi-asset funds.
Index Funds
Index funds invest in stocks that correspond with a major market index or a segment of the market. This strategy requires less research from analysts and advisors, so fewer expenses are passed on to shareholders, and these funds are often designed with cost-sensitive investors in mind.
Legendary investor Warren Buffett has recommended index funds as a haven for savings for the later years of life. Rather than picking out individual stocks for investment, he has said, it makes more sense for the average investor to buy all the S&P 500 companies at the low cost of an index fund.
Examples of Top Index Mutual Funds in UAE
Top mutual funds like Vanguard 500 Index Fund Admiral Shares (VFIAX) and Fidelity 500 Index Fund (FXAIX) mirror the S&P 500 index, offering exposure to 500 of the largest companies in the U.S. stock market across various industries. The 50 stocks within the mutual funds have approximately the same weighting as the stocks within the S&P 500.
The minimum investment requirement is $3,000, but for those who can't meet the initial investment or want a more straightforward way to get the same market exposure, Vanguard, Fidelity, BlackRock, and StateStreet Global Advisors are offering exchange-traded funds (ETF) with exposure to one of the U.S. stock market's most closely followed benchmarks.
iShares Core S&P 500 ETF, Vanguard S&P 500 ETF, and SPDR Portfolio S&P 500 are tailored for investors seeking the lowest expense ratios. The SPDR S&P 500 ETF (SPY) is best for investors and active traders who want the most liquidity.
For UAE mutual fund investors, the iShares MSCI UAE ETF seeks to track the investment results of an index composed of UAE equities.
See how to invest in the UAE stock market via UAE ETF.
Stock Funds
Typically carry the greatest risk alongside the greatest potential returns. Fluctuations in the stock market can drastically affect the returns of equity funds. There are several types of equity funds, with each of these groups trying to maintain a portfolio of stocks with certain characteristics.
Some equity funds are named for the size of the companies they invest in, small-, mid-, or large-cap. Others are named by their investment approach: aggressive growth, income-oriented, value, and others. Equity funds are also categorized by whether they invest in domestic (U.S.) stocks or foreign equities.
Examples of Top Stock Mutual Funds
The Vanguard Total Stock Market Index Funds (VSMPX and VTSAX) provide exposure to the entire U.S. equity market: small-, mid-, and large-cap growth and value stocks. Created in 1992, these top mutual funds have thousands of stocks in their holdings, including Apple, Microsoft, Amazon, Alphabet, and Tesla.
For those who can't meet the $3,000 initial investment, Vanguard also offers an exchange-traded fund (ETF) called the Vanguard Total Stock Market ETF (VTI). The ETF version is like the VTSAX, costs the price of one share, and is available through an online brokerage platform like CAPEX.com.
Bond Funds
Bond funds are typically less risky than stock funds. There are many different types of bonds, so you should research each mutual fund individually to determine the amount of risk associated with it, as all bond funds are subject to interest rate risk.
A mutual fund that generates a minimum return is part of the fixed-income category. A fixed-income mutual fund focuses on investments that pay a set rate of return, such as government bonds, corporate bonds, or other debt instruments. The fund portfolio generates interest income that is passed on to the shareholders.
Examples of Top Bond Mutual Funds
Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) provides investors with investment exposure to U.S. investment-grade bonds, including U.S. Treasuries and mortgage-backed securities. The fund's holdings are primarily U.S. government bonds with 66.5% of the fund's weighting, while 3.7% are AAA-rated bonds and 3.1% are AA-rated.
For those who can't meet the $3,000 initial investment for the VBTLX, Vanguard also offers an exchange-traded fund (ETF) called the Vanguard Total Bond Market ETF (BND) Vanguard’s Biggest Bond ETF Becomes First to Break $100 Billion for the first time since such products were launched two decades ago.
Long-term Treasury bond ETFs, such as the iShares 20+ Year Treasury Bond ETF (TLT), or the iShares International Treasury Bond ETF that seek to track the investment results of an index composed of non-U.S. developed market government bonds., are some of the most liquid and popular choices here.
Money market funds
These products often have the lowest returns because they carry the lowest risk, although are not as quite as safe as cash. Money market funds are legally required to invest in high-quality, short-term investments that are issued by the national government or large corporations.
Returns from these types of mutual funds are dependent on the applicable market interest rates, and therefore, the overall returns from the money market funds are also dependent on interest rates.
Examples of Top Money Market Mutual Funds
Vanguard Federal Money Market Fund (VMFXX) and Fidelity Government Money Market Fund (SPAXX) seek to provide current income consistent with the preservation of capital and liquidity. While VMFXX invests in short-term, high-quality money market securities issued by US government agencies, SPAXX invests in US government securities and repurchase agreements for the same and enters into reverse repurchase agreements.
For those who can't meet the large initial investment, the ETF version of money market funds is growing fast. The closest thing to money market funds in the ETF space is ultra-short-term bond ETFs. Like their mutual fund counterparts, these exchange-traded funds hold debt with maturities of 1-3 years or less.
Some of the most popular funds in the category include iShares Short Term Corp Bond ETFs, Pimco 0-5 Year High Yield Corporate Bond ETF, or iShares 1-3 Year Treasury Bond ETF.
Balanced funds
This type of mutual fund invests in a mix of stocks, bonds, and other securities. Balanced funds (also called asset allocation funds or hybrid funds) are often a “fund of funds,” investing in a group of other mutual funds. One popular example is a target-date fund, which automatically chooses and reallocates assets toward safer investments as you approach retirement age.
Some funds are defined with a specific allocation strategy that is fixed, so the investor can have a predictable exposure to various asset classes. Other funds follow a strategy for dynamic allocation percentages to meet various investor objectives. This may include responding to market conditions, business cycle changes, or the changing phases of the investor's own life.
Examples of Top Balanced Mutual Funds
Vanguard Balanced Index Fund Admiral Shares and Fidelity Balanced Fund invests roughly 60% in stocks and 40% in bonds and other debt securities, including lower-quality debt securities, when its outlook is neutral.
For those who can't meet the large initial investment, the ETF version of the multi-asset mutual funds is growing fast.
The iShares Core Growth Allocation ETF is one of the best choices for investors seeking a low-fee, passively managed, core-holding balanced fund for their portfolios.
Mutual Funds vs ETFs vs Index Funds Stocks
With so many different types of investments out there, it can be difficult to choose which ones are right for you. Here is a quick comparison between three of the most popular types of investments.
Mutual Funds vs ETFs
The biggest similarity between them is that they both represent managed "baskets" of individual securities, like various stocks or bonds, providing exposure to a wide range of asset classes and markets. However, there are some important differences.
The most apparent is that ETF shares are traded on stock exchanges just like regular stocks, while mutual fund shares are traded only once per day after markets close. This means ETFs can be traded at any time during market hours, offering more liquidity, flexibility, and real-time pricing. Additionally, since ETFs are traded on exchanges, they may be eligible for buying on margin and short sales.
Another major difference is pricing and valuation. Because ETFs trade actively, their prices fluctuate throughout the day according to supply and demand, like stocks. Mutual funds, on the other hand, are priced only at the end of each trading day based on the net asset value (NAV) of the underlying portfolio. This also means that ETFs have the potential for larger premiums/discounts to NAV compared to mutual funds.
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Our WebTrader platform and app offers hundreds of ETFs that track the performance of specific indices, bonds, or a group of assets that you can trade via a CFD account or buy outright via an Invest account.
Mutual Funds vs Index Funds
Index funds are a type of mutual fund that aims to replicate the performance of a market benchmark, or index. For example, an S&P 500 index fund tracks that index by holding the 500 companies in the same proportions. A key goal of index funds is minimizing costs to closely mirror their index.
By contrast, actively managed mutual funds try to beat the market by stock picking and shifting allocations. The fund manager makes choices to achieve returns greater than a benchmark through their investing strategy and research.
Index funds offer market returns at lower costs, while active mutual funds aim for higher returns through skilled management that often comes at a higher price. Investors should consider costs, time horizons, and risk appetite when deciding between index or managed mutual fund investing.
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Mutual Funds vs Stocks
The biggest difference between mutual funds and stocks is that stocks are an investment in a single company, whereas mutual funds have many investments — meaning potentially hundreds of stocks — in a single fund.
While direct stock market investments offer control and the potential for higher returns, they come with increased risk and the need for diligent research. On the other hand, mutual funds provide professional management, diversification, and convenience, making them an attractive option for many investors.
Ultimately, the choice between these investment avenues depends on individual preferences, risk appetite, and investment goals.
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Risks of Investing in Mutual Funds in UAE
Mutual funds are not guaranteed investments and fluctuate depending on various reasons. We are now going to discuss the various risks involved in these investments.
- No Guarantees: Mutual funds invest in stocks and the price of some of the stocks may fall bringing the value of those stocks down, but this is easily balanced by other stocks because mutual funds do not invest in just one kind of stock.
- High Costs: Mutual funds provide investors with professional management, but fees that reduce the fund's overall payout are assessed to mutual fund investors regardless of the performance of the fund. Since fees vary widely from fund to fund, failing to pay attention to the fees can have negative long-term consequences.
- End-of-Day Trading Only: A mutual fund allows you to request that your shares be converted into cash at any time, however, unlike stock that trades throughout the day, many mutual fund redemptions take place only at the end of each trading day.
- Risk due to interest rate: When there are fixed-income securities in the portfolio of a mutual fund, and interest rates rise, prices fall and when interest rates drop, prices increase. As securities are just a portion of the total portfolio, and the other investments balance the overall price, it will only be a problem if a significant portion is invested in it.
- Risk due to default: In the case of investment in corporate bonds, there is a chance of default, and the bonds may become a bad investment bridging down the value of the portfolio. This problem is more evident in bonds issued by private players. However, there are rating agencies that rate companies in accordance with their overall credibility, and purchases are made accordingly.
Advantages of Investing in Mutual Funds in UAE
There are many advantages of investing in mutual funds, especially for beginners and people with less capital, which cannot be compared to any other kind of investment, we are going to discuss them one by one:
- Diversification: Diversification, or the mixing of investments and assets within a portfolio to reduce risk, is one of the advantages of investing in mutual funds. A diversified portfolio has securities with different capitalizations and industries and bonds with varying maturities and issuers. A mutual fund can achieve diversification faster and more cheaply than buying individual securities.
- Easy Access: Trading on the major stock exchanges, mutual funds can be bought and sold with relative ease, making them highly liquid investments. Also, when it comes to certain types of assets, like foreign equities or exotic commodities, mutual funds are often the most feasible way, sometimes the only way for individual investors to participate.
- Professional Management: Mutual fund managers are thoroughly trained professionals with years of experience, at the same time they are concerned about their professional reputation and accordingly are better equipped to understand and analyze the markets than a lay investor. Hence chances of losing money are very small.
- Transparency: Mutual funds may focus on value investing, growth investing, developed markets, emerging markets, income, or macroeconomic investing, among many other styles. This variety allows exposure to not only stocks and bonds but also commodities, foreign assets, and real estate through specialized mutual funds, that may not otherwise be directly accessible to ordinary investors.
Mutual Funds Investment Strategies
Individual investors can look for mutual funds that follow a certain investment strategy that they prefer or apply an investment strategy themselves by purchasing shares in funds that fit the criteria of a chosen strategy.
Value Investing
This mutual fund investment strategy focuses on identifying companies with genuine value and whose stock prices were either undervalued or at the very least not overinflated and therefore not easily prone to a dramatic fall. The classic value investing metric used to identify undervalued stocks is the price-to-book (P/B) ratio.
While mutual funds themselves do not technically have P/B ratios, the average weighted P/B ratio for the stocks that a mutual fund holds in its portfolio can be found at various mutual fund information sites. There are hundreds, if not thousands, of mutual funds that identify themselves as value funds.
Contrarian Investing
Contrarian investors go against the prevailing market sentiment or trend. A classic example of contrarian investing is short selling, or at least avoiding buying stocks of an industry when investment analysts across the board are virtually all projecting above-average gains for companies operating in the specified industry.
Contrarian trading strategies tend to be driven more by market sentiment factors than they are by value investing strategies and rely less on specific fundamental analysis metrics such as the P/B ratio. There are plenty of mutual funds that can be identified as contrarian funds.
Momentum Investing
Momentum investing aims to profit from following strong existing trends and is closely related to a growth investing approach. Metrics considered in evaluating the strength of a mutual fund's price momentum include the weighted average price-earnings to growth (PEG) ratio of the fund's portfolio holdings, or the percentage year-over-year increase in the fund's net asset value (NAV).
Momentum investors seek to identify specific sectors or industries that are demonstrating clear evidence of strong momentum. After identifying the strongest industries, they invest in the best mutual funds offering the most advantageous exposure to companies engaged in those industries.
In sum, how to invest in mutual funds in the UAE?
Mutual funds are a versatile and accessible investment option for individuals looking to diversify their portfolios. Investors can choose from various types of mutual funds, such as stock funds, bond funds, money market funds, index funds, and target-date funds, each with its investment focus and strategy.
Mutual funds are an established investment vehicle, but ETFs have gained popularity in the last few years. ETFs are generally less expensive than mutual funds in UAE but with less management and reduced services.
Because ETFs are traded like stocks, though they have intra-day liquidity, and you can do things with them you can't do with mutual funds, including writing options against them, shorting them, and buying them on margin.
Free resources
Before you start investing in index funds and ETFs you should consider using the educational resources we offer like CAPEX Academy or a demo trading account. CAPEX Academy has lots of trading and investing courses for you to choose from, and they all tackle a different financial concept or process – like the basics of analyses – to help you become a better trader or make more informed investment decisions.
Our demo account is a suitable place for you to learn more about leveraged trading, and you’ll be able to get an intimate understanding of how CFDs work – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for investors who are looking to make a transition to leveraged trading.