How to Invest in Mutual Funds in Saudi Arabia?

January 5, 2022

A detailed guide to help you invest in Mutual funds in Saudi Arabia without any hassle!

Areej M Alturki
Founder

The Kingdom of Saudi Arabia established its stock exchange, Tadawul, in 2007. Strict regulations in the country permit only recognized financial institutions to trade on its stock exchange. However, despite a decline in oil prices, the Tadawul is the largest capital market in the Middle East and the most dominant exchange in the Gulf Cooperation Council. Surprisingly, Tadawul only has 150 companies listed, with the state oil company Saudi Aramco being the biggest one.

The Saudi stock market has been open to foreign investments since 2015. All offerings in Tadawul, including mutual funds, are Sharia-compliant. As a booming economy, the Middle Eastern Kingdom offers unique opportunities for investors to earn returns in the stock market. Let's take a look at mutual funds in Saudi Arabia.

What is a mutual fund? 

Although mutual funds sound complicated and confusing to many, it's actually a pool of money gathered from several different investors and invested into different types of securities. The pool of money is overseen by a professional money manager or fund manager who makes collective investments in the market to achieve capital gains for the investors.

Mutual funds are suitable for investors who do not have large sums to invest or do not have a comprehensive understanding of the market but want to grow their wealth. Trusts like mutual funds allow individuals to participate in the stock market and have their securities (bonds, equities, money market instruments, and other assets) professionally managed by qualified personnel with knowledge of the market. 

A mutual fund maintains a portfolio that matches the investment objectives of the involved parties. The returns generated are divided proportionately among all the investors. One thing to understand is that a mutual fund is both a company and an investment. 

The mutual fund's value is determined by the performance of the securities it purchases. Therefore, when an investor purchases a mutual fund unit or share, they essentially purchase the portfolio's performance or a small portion of the entire portfolio's value. 

Investing in mutual fund shares is not the same as investing in a stock. That's because mutual fund shares, unlike stock, do not provide holders with voting rights. Instead, a mutual fund share represents investments in a multitude of stocks or other securities in contrast to just one holding. 

The market price of a single mutual fund share is called NAV or net asset value per unit. The NAV of a fund is equivalent to the combined market value of all the securities held by the company divided by the total number of shares outstanding. 

Mutual fund shares are customarily purchased or redeemed at the fund's current NAV and do not change during market hours. Instead, the NAV is settled after each trading day. Consequently, when the NAVPS is settled, the price of a mutual fund is likewise changed.

Types of mutual funds

Mutual funds provide a variety of investment options across the financial spectrum. Because investing objectives differ from investor to investor– post-retirement costs, money for children's education or marriage, house purchase, etc. – so do the products required to attain these objectives.

All mutual fund companies are classified into different categories based on the securities they have chosen for their investment portfolios and the type of returns they want. Here are the primary types of mutual funds that you can invest in:

Equity funds

Equity funds primarily target stocks of various companies. Equity funds are popular due to their ability to generate better ROI than other types of securities. All equity and equity-related assets are subject to market risks; however, the risk profiles of different forms of equity securities vary. 

One key risk feature of equity is based on the company's size or market capitalization. A company's market capitalization is calculated by multiplying the market price of its shares by the number of shares outstanding.

Under equity funds, a company can be a small-cap, mid-cap, large-cap, multi-cap, or large & mid-cap. Companies that invest in the top 100 stocks fall under large-cap, those that invest in 101st to 250th stocks are midcap, and funds that invest in 251st and smaller stocks are called small-cap. 

Mutual funds that target stocks across different market capitalizations are considered to be multi-cap funds. Large and mid-cap funds are companies that allocate equal equity between mid-and large-cap funds to offer high returns. Furthermore, depending on the investment approach, they can be further classified into income-oriented, aggressive growth, value, dividend yield, etc. The majority of equity funds employ an active investment strategy, which means that the assigned fund manager determines the portfolio's composition.

Fixed-income funds

Fixed-income mutual funds focus on debt securities such as government bonds and debentures. Debt securities have varying market risks; for example, investing in government debt securities will have a very low risk, while investing in private company bonds will have more significant hazards. However, fixed-income funds are still regarded as low-risk mutual funds. 

In such funds, the company pays a steady rate of return in exchange for an interest income distributed among all the holders. The fixed-income fund is regarded as a powerful tool for investors who wish to invest in moderate-risk securities over 1-2 years or more. These funds usually outperform certificates of deposit and money market investments in terms of ROI. 

Index funds

There are mutual fund schemes whose portfolio composition is modeled after a specific index. The term "index fund" refers to a form of a mutual fund or exchange-traded fund that aims to replicate the returns of a market index. 

These passively managed funds prefer to invest in the same firms as the index they track. This means they want to optimize long-term gains by not buying and selling shares frequently. On the other hand, an actively managed fund frequently aims to outperform the market (typically as measured by some kind of index) by making more frequent acquisitions and sales.

Since index funds do not require active management on the part of the fund manager, these funds are low-cost. Index funds can track a market index in a variety of ways. For example, some companies invest in all of the assets in a market index, while others invest in only a subset of the securities in a market index.

Balanced funds

Balanced funds are known as asset allocation funds. They are primarily a mix of asset classes such as bonds, stocks, money market instruments, or alternative investments. In most cases, balanced funds invest with a fixed ratio, such as 60% stocks and 40% bonds. 

Other funds use a dynamic allocation technique to accommodate the needs of different investors. This may involve reacting to market conditions and changes in the business cycle.

Money market funds

Money market funds are fixed-income mutual funds that invest in high-quality, short-term government, bank, or corporate debt. Although the returns are comparatively low, money market funds are made up of risk-free, short-term debt instruments such as government Treasury bills. 

Bond funds

Bond funds are the most prevalent fixed-income mutual fund, in which participants are paid a predetermined sum back on their initial investment. Bond funds, as opposed to equities, invest in government and corporate debt. While considered a safer investment than stocks, bond funds offer less potential for growth than equities funds.

Why should you invest in mutual funds in Saudi Arabia?

As a growing G20 economy, Saudi Arabia is buzzing with potential and opportunities. Thanks to its strong mutual funds market, the Saudi Arabian stock exchange is presently the frontrunner among its GCC peers. The growing list of assets and products means there is something for everyone. 

The mutual fund market is considered to be a safe bet for first-time investors with an appetite for high-risk investments. Moreover, there is ample room for portfolio diversification with different types of assets classes. The Tadawul is supported by a stable economy, tight finances, and a well-regulated financial system. So, now is the best time to invest in mutual funds in Saudi Arabia.

How to invest in mutual funds online in Saudi Arabia?

Here is how you can invest in mutual funds online in the Kingdom of Saudi Arabia:

Determine your investment goal

You need to have clear and well-defined financial goals, budget, and resting period in mind. These goals will help you decide how much money you can set away for investing. Furthermore, you must invest based on your risk tolerance. 

Choose a fund type

Since there are various types of mutual funds, you need to narrow down your choices. The mutual fund should align with your return goals. Usually, a balanced or debt fund is ideal for first-time investors.

Shortlist an optimal mutual fund

With a variety of mutual fund schemes in each category, it is necessary to analyze and evaluate them in order to select the best investment. You should consider the fund manager's credentials, expense ratio, portfolio components, and assets under their management.

Diversify the investment portfolio

To diversify your portfolio and earn risk-adjusted returns, you should be investing in multiple mutual funds. A fund portfolio will allow you to diversify across asset classes and investment types. Therefore, it will help you lower the risks. 

Open a net banking account

You must have internet banking enabled on your bank account in order to invest in mutual funds. Mutual funds also accept debit cards and checks for investments, but doing so through net banking is a more straightforward, faster, and secure way to make investments.

Keep your documents ready

You need proper documents to be able to invest in mutual funds. So ensure that your documents are ready and in compliance with the Saudi Arabian regulations. 

Follow the steps given below to open your account on Nakla and start your investment journey:

  • Open an online account with Nakla.
  • Complete all the necessary formalities.
  • Enter your personal details as required.
  • Identify and mention the fund/ funds you want to invest in.
  • Select the particular fund and transfer the specified amount.
  • Generate a standing instruction with your bank for SIP.

Conclusion

No matter what type of mutual fund you invest in, do your research and understand the local regulations. To trade in the Tadawul, you will need the help of a broker or investment bank to help you navigate the market. By choosing the right partner, you can make significant market gains and avoid losses.

FAQs about Mutual Funds

Is it better to invest in mutual funds or stocks?

Whether mutual funds are better than stocks or vice versa is subjective. When it comes to stocks, you are solely responsible for picking the stocks. On the other hand, people investing in mutual funds have the advantage of having their investment portfolio handled by a professional Fund Manager. To make profitable stock investments, you need to be an active participant in the stock market with in-depth knowledge about the latest trends. Therefore, stocks are good options for those with extensive experience and market knowledge. At the same time, mutual funds are more well-suited for inexperienced and passive investors. 

How do beginners invest in mutual funds?

For beginners to invest in mutual funds, they need to understand the market before putting their money in it. There are numerous types of funds in the market that serve different purposes. So, you must choose a suitable type that caters to your investment needs. Once you have narrowed down the type, select a mutual fund that offers the best incentives and meets your requirements. Evaluating the asset portfolio, credentials, and other critical details is essential before opting for a mutual fund. You can sign up to a verified investment platform, provide your documents, and specify the amount you wish to invest. 

Which is the best mutual fund for beginners?

All mutual funds have associated market risks. So identifying the best mutual fund for beginners truly depends on the individual investor's objectives, goals, and risk tolerance. Low-risk mutual funds include large-cap funds, bond funds, and fixed income funds. Moreover, it's essential to read the terms and conditions before signing up for any mutual fund. Also, the thumb rule of any investment is that you should only invest what you're willing to lose.

Can mutual funds get you rich?

Yes, mutual funds can help you get rich. The primary objective of a mutual fund is to provide its investors with capital gains. However, you must be aware of market volatility and understand how mutual funds work. If you wish to gain ROI fast, remember that the associated risk will be higher. If you want to stay on the safer side, then the returns on these funds will be comparatively lower.

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