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Passive Investments In The MENA Region: A Brief Overview

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May 18th, 2022 13:20

Passive investments in the MENA region

Passive investment in the MENA (the Middle East and North African region) is yet paving its way to gain popularity in the region where most investors are inclined towards active investment. Nevertheless, the current market and its emerging tendencies can point towards more engagement in the former.

With the pandemic rendering the world to a standstill, the financial markets have become extremely volatile. Unpredictable tendencies of the market can impact businesses, employment, and very importantly, investment.

Existing and potential investors can become wary of the risks it entails and might choose to pull out the plug for the time being. The MENA has been no stranger to the falling economy and the skepticism surrounding investment in this fluctuating environment is nothing but justified. 

These reservations and difficulty, however, do not imply impossibility. While active investing for the short-term might not be a risk-free decision, passive investment in the MENA can prove to be rather purposeful.

Now, why is passive investing a better option in this context? 

  • Passive investing essentially requires you to buy and hold securities for the long run
  • This is a lower-cost alternative, investments in which can be relatively less risky
  • There are fewer transactions involved in a passive indexing investment as it entails observing the performance of a pool of assets

What is the distinction between active and passive investments?

While the approach of active investment management is to be expeditious and hands-on, passive investment rather entails a dormant strategy where you need not be fast-track. Active investment requires putting more effort and comprehensive market analysis is needed to go in that direction since the objective is to ultimately benefit from the returns. 

Both quantitative and qualitative aspects need to be understood as an active investment involves more complexity. Fund managers analyze the market as this requires expertise and offers a range of investments. 

The aim is to outperform the market, therefore keeping abreast of every fluctuation and development is necessary. Moreover, given the frequency of the transactions, active management is more inclined towards the short-term.

Passive investment postulates investment in stocks in a particular index. You do not need to beat the market in this type of investment as the returns you receive are more or less similar to the benchmark. 

It essentially mirrors the performance of an index to receive slow and consistent returns.

Should you try your hands in passive investment?

The type of investment you choose primarily depends on the returns you’re expecting, the risk you’re willing to take, and the amount you can invest. 

Hence, keeping in mind the relevant facts and circumstances, you can weigh the cost and benefits of your prospective investors to reach an informed decision. These are some of the pros and cons of passive investment:

Pros:

Cost-effective and tax advantage

Passive investment is a cheaper alternative compared to active investment. The cost of investing is lesser because it limits your transactions within your portfolio. The fund managing cost also lies on the inexpensive side as it does not require the manager to keep their eyes peeled. 

Passive investments bear long-term capital gains taxes which are usually more favorable to a person. Whereas, active investments, if bought and sold in the short-term, are subject to short-term capital gains tax which are charged at a higher rate, hence giving the former an edge in terms of tax benefits.

Less complexity

Easy to fathom, passive investment index funds do not require a great deal of study, research, and work. 

You can buy the securities and hold them while being dormant. Primarily, efforts are usually needed while buying and selling the funds, which have a considerable duration between them.

Moderate risk

You do not have to outperform the market but simply have to replicate the index. This offers less amount of risk than its counterpart. Moreover, in a market pervaded with volatility, this low-risk factor becomes one of the prominent reasons to choose this option. 

Cons:

Slow and low returns

If you’re looking for quick returns given at a high rate, passive investments might not be your cup of tea. The returns add up, in the long run, to make a significant amount; however, transacting this for the short term would not have any considerable benefit to your portfolio.

Cannot beat the market

Regardless of whichever stock you select, it is highly unlikely in passive investing to be able to beat the market. There are fewer opportunities for earning a profit in the short run, however, the highs and lows of the market eventually impact your returns after a certain term.

Conclusion

Passive investment is ideal for a long-term investment as there are not a lot of costs involved and the risk factor is also less. So, if you think it’s for you, then calculate your risks, do your research and get going!

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Frequently asked questions 

1. What is a passive investment?

  • Passive investment requires buying and holding securities. It does not entail frequent buying and selling like active trading. Moreover, it is relatively inexpensive as it does not require active management. 

2. Why is passive investment better?

  • Passive investing does not require you to be on your feet and frequently indulge in trading. It simply replicates an index and tries to match its performance. It also has fewer costs associated with it and therefore is believed to be convenient. 

3. What are the pros of passive investing?

  • Primarily, there are three benefits that make passive investing appealing. Firstly, it does not require you to invest or to spend a huge corpus of funds. Secondly, it’s relatively more transparent than active investing and thirdly, it has certain tax benefits as well.

4. What are the cons of passive investing?

  • Passive investment cannot outperform the index. In fact, on the other hand, it is capable of underperforming. Moreover, the buying and selling decisions in passive investing are not based on research but on the index.

5. What are some good passive investment options?

  • Although there are a number of passive investment instruments available in the market, some of the common and convenient ones are real-estate investments, indexed funds, and dividend-paying stocks.



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