Investment Fund in Saudi Arabia: Types, Features, and Regulations 2024

An investment fund is a financial entity that pools capital from a group of investors to collectively invest in a portfolio of diverse financial assets, such as stocks, bonds, sukuk, real estate, and more. The fund is managed by a professional investment manager with expertise in analyzing financial markets and applies a pre-defined investment policy that aligns with the fund's objectives and acceptable risk level. Investment funds have several characteristics:

1. Diversification: Allocating capital across multiple assets reduces risks compared to investing in a single asset.
2. Professional Management: Funds are managed by licensed companies or experienced investment managers.
3. Supervision and Regulation: All funds in Saudi Arabia are supervised by the Capital Market Authority (CMA).
4. Transparency and Disclosure: Funds are required to issue periodic reports and provide clear information to investors.
5. Liquidity: Varies depending on the type of fund (open, closed, traded).

In the Saudi market, there are several types of investment funds, each with its own characteristics and objectives:

1. Open-End Investment Funds: Allow investors to enter and exit at any time by buying and selling units.
2. Closed-End Investment Funds: Have a fixed number of units and are often traded in the financial market.
3. Exchange-Traded Funds (ETFs): Track a market index and trade their units in the market like stocks.
4. Real Estate Investment Trusts (REITs): Invest in real estate and distribute the majority of profits periodically.
5. Specialized Funds: Such as fixed-income funds and local or international equity funds.

Each type targets a specific category of investors and is subject to specific regulatory controls.

Investment funds in Saudi Arabia are managed by licensed companies or professional investment managers. Each fund has a declared investment policy that defines the type of targeted assets, the proportion of investment in each category, and the acceptable risk level. Assets are selected based on financial and technical analyses, considering the fund's objectives (growth, income, balance).

The fund is overseen by a board of directors or an investment committee that ensures the manager adheres to the investment policy and monitors performance. Saudi regulations impose disclosure and transparency requirements, such as publishing quarterly and annual reports on fund performance and managed assets, and providing detailed prospectuses upon offering.

This structure enhances trust and provides protection for investors.

All investment funds in the Kingdom are subject to the supervision of the Capital Market Authority (CMA), which establishes strict regulations to ensure investor protection and achieve transparency. These regulations include:

- Requiring the fund to publish a detailed prospectus outlining the investment policy, risks, fees, and expenses.
- Periodic disclosure of performance and net asset value (NAV).
- Requiring funds to appoint an independent custodian to protect investors' assets.
- Periodic audits by a licensed external auditor.
- Clear policies for risk management and governance.

Through these controls, the authority seeks to enhance the level of transparency and trust in the Saudi financial market.

REITs are traded real estate investment funds listed on the Saudi financial market that invest in income-generating real estate assets such as shopping centers, offices, and residential complexes. These funds must distribute the majority of their annual profits (at least 90% of the distributable net income), making them a popular choice among investors seeking periodic returns.

Examples of REITs listed in the Saudi market include Bonyan REIT (4346), Al Ahli REIT (4160), and others. Units of these funds are traded in the same manner as stocks, with the unit price determined by supply and demand and the book value of the assets. REITs are subject to strict periodic disclosure requirements from the Capital Market Authority.

Exchange-Traded Funds (ETFs) are funds that invest in a range of stocks or financial instruments to track the performance of a specific market index (such as the Saudi market index or a specific sector). Units of these funds can be traded in the financial market in the same way as stocks, providing investors with flexibility to enter and exit during trading sessions.

ETFs are characterized by clear strategy, lower management costs compared to actively managed funds, and transparency in asset structure. Some of the most well-known ETFs in Saudi Arabia include Falcom 30, Al Ahli Saudi Index Fund, and others.

These funds are a suitable option for those looking to invest in market indices without the need to manage an individual portfolio.

The investment fund sector in Saudi Arabia has experienced continuous growth in recent years. According to the latest data for 2024, the total assets of investment funds (including REITs, closed funds, and indices) exceeded 100 billion Saudi Riyals. Meanwhile, the Public Investment Fund (PIF) – a sovereign fund and not commercial – has assets amounting to approximately 3.47 trillion Riyals.

Statistics indicate that investment funds represent about 5% of the trading volume in the Saudi stock market, with an expected annual growth rate of 8-10%. REITs and closed funds distribute annual returns ranging from 3-7% depending on the fund's policies and asset performance.

The number of traded real estate funds (REITs) has also increased to dozens of funds, with a growing diversity in targeted real estate sectors.

Investors can purchase units of Saudi investment funds through several channels:

1. Local Banks: Most Saudi banks offer subscription and purchase services for the funds they manage or those managed by other companies.
2. Licensed Brokerage Firms: Electronic trading platforms allow direct buying and selling of traded fund units (ETFs, REITs) in the market.
3. Fund Managers' Websites: Some companies offer online subscription for open-end funds.

Investors should carefully read the prospectus to understand the fees, investment policy, risk level, and redemption periods for units, emphasizing the need for the fund to align with their financial goals.

When analyzing listed investment funds (such as REITs), investors pay attention to a range of financial indicators, including:

- Unit Price: Changes daily based on supply and demand.
- Market Capitalization: Unit Price × Total Number of Units.
- Net Asset Value (NAV): Value of the fund's assets after deducting liabilities.
- Distribution Yield: Ratio of annual distributed profits to the average unit price.
- Distribution Multiple: Average unit price ÷ Annual Distributions.

For example, the unit price of Bonyan REIT was approximately 15.25 Riyals at the end of 2024, with a market value exceeding 800 million Riyals, and an annual distribution yield around 6%.

Investing in investment funds differs from direct investment in stocks or sukuk:

- Investment funds provide diversification and risk reduction through a diverse portfolio.
- Individual stocks carry higher risks but give the investor direct control over their decisions.
- Sukuk (Islamic bonds) provide fixed income with relatively lower risks.

Funds are suitable for those who prefer professional management and diversification, while stocks and sukuk may suit experienced investors who wish to make individual decisions. Each tool has its advantages and disadvantages, and understanding them well is essential before choosing any of them.

Investment funds typically impose annual management fees (ranging from 0.5% to 2% depending on the type of fund), as well as subscription or redemption fees in some cases. Additional performance fees may also be charged if the fund exceeds specific benchmarks.

These fees are deducted from the net asset value and directly affect the returns achieved by the investor. Therefore, it is always advisable to compare the fees of different funds and read the prospectus to understand all costs, emphasizing that the choice of fund should align with the investor's goals and not solely based on the lowest fees.

Although investment funds aim to reduce risks through diversification and professional management, they remain subject to market risks (price volatility, interest rate changes, economic risks), credit risks, and liquidity risks (especially in closed or real estate funds).

The Capital Market Authority requires all funds to disclose the main risks in their prospectuses and periodic reports, including scenarios of negative performance. Investors should carefully read these disclosures and assess the fund's suitability for their risk tolerance.

Investment funds play a pivotal role in achieving the goals of Saudi Vision 2030 by diversifying income sources, supporting the business sector, and increasing the contribution of the non-oil financial sector to GDP.

Funds contribute to injecting liquidity into various strategic projects (real estate, industrial, technological), provide investment opportunities for citizens and residents, and enhance transparency and trust in the financial market. They also support government efforts in developing infrastructure and growing promising sectors, achieving sustainable economic growth in the long term.

Some of the prominent examples of listed investment funds in the Saudi market include:

1. Bonyan REIT (4346): A diversified real estate investment, with a unit price of approximately 15.25 Riyals at the end of 2024 and an annual distribution yield of around 6%.
2. Al Ahli REIT (4160): Focuses on the commercial sector, with a unit price of around 10 Riyals and an annual distribution of about 0.6 Riyals.
3. Index funds like Falcom 30: Allow diversified investment in the largest 30 Saudi companies.

These examples illustrate the diversity of fund types and their objectives, and detailed data can be obtained through the Tadawul website.