Building additional income and smart money management have become increasingly important aspects of financial planning. There are many investment options available, with the top five most common investment methods being:
- Real estate purchases
- Bank savings
- Life insurance
- Stock purchases
- Investing in alternative investment funds
According to available data, Serbian citizens traditionally invest most heavily in real estate, viewing it as a safe way to preserve capital. However, in recent times, interest in alternative investment funds has been growing, offering greater flexibility and potentially better returns.
Real estate as an investment – Safe returns or long-term challenge?
In Serbia, investing in real estate has traditionally been one of the most popular forms of passive income. According to the Republic Geodetic Authority, there were a total of 121,627 property transactions in 2023, which represents a 15.7% increase compared to 2019, before the COVID-19 pandemic.
The value of real estate typically rises, and renting properties generates passive income. But is it truly that simple? Investing in real estate doesn’t allow you to sit back while your income grows, as managing and renting out apartments, houses, or buildings requires time and attention.
Additionally, real estate investments require significant initial capital, and the process of purchasing, maintaining, renting, and possibly selling properties can be lengthy and complicated. In Serbia, it can take 15 to 20 years to recoup your investment in real estate, depending on the average rental income. Moreover, the real estate market isn’t always predictable—economic crises can lead to price drops, slowing the return on investment. Given the potential market fluctuations due to economic turmoil, diversification (spreading investments across different assets) is crucial if you want to achieve stable and secure returns.
Life insurance – Long-term security for you and your family
According to data from the National Bank of Serbia in 2023, life insurance policies in Serbia are typically purchased by people in their thirties who have become parents. In addition to providing essential protective coverage, life insurance policies often include savings components, allowing policyholders to accumulate capital over time. This investment option is particularly important for those seeking to secure their family’s financial future.
However, the total insurance premiums (both life and non-life) in Serbia have remained stagnant at 1.8% of the gross domestic product (GDP) for the past decade.
One of the main downsides of life insurance as an investment is the lower return on investment compared to other options. Moreover, understanding all aspects and conditions of the insurance policy can be complex and demanding. Among the wide array of available policies, it’s important to find the one that best suits your needs. The funds can only be accessed after many years, depending on the terms of the contract, and the maximum age limit varies, typically ranging from 65 to 75 years.
Bank savings – Safe, but limited returns
Bank savings are one of the most conservative and common investment options. Deposits are insured up to 50,000 euros, but anything above that is exposed to the risks of the bank’s financial stability. Interest rates on term deposits have been declining for years, hovering around 2% annually for euro deposits. If your money is sitting in the bank without an adequate interest rate, inflation will cause your money to lose more value than the interest you earn. Given this year’s inflation rate of 4.5%, it means the real value of your savings is decreasing.
Alternative investment funds – Opportunities for diversification and higher returns
Although bank savings seem like a safe option, their interest rates are often low compared to alternative investment funds, which historically offer annual returns between 11% and 20%. One example is the Vista Rica alternative fund, which generated a return of 11.5% last year.
Funds in alternative investment funds can be withdrawn at any time, which is an advantage over real estate and life insurance, where funds are tied up for longer periods. However, if you wish to receive significant tax breaks through investment in alternative funds, your funds will be available after three calendar years, in accordance with the Personal Income Tax Law. Additionally, this investment option offers more flexibility than investing in real estate, where capital is tied up long-term. Another advantage is that investors do not need to manage the investment themselves, as a portfolio manager handles their money.
Alternative investment funds operate on the principle of purchasing investment units. Investors contribute capital, which is then invested by the management company, generating returns. Unlike individual investing, where you must track the market and analyze opportunities, investing in funds saves time, as financial experts make the decisions on behalf of investors. The returns compound annually, and long-term growth potential and higher returns make alternative funds increasingly popular.
Introduced in Serbia in 2019 under the Alternative Investment Funds Law, these funds differ from traditional investment funds by allowing a broader range of investment instruments. In addition to capital markets (stocks and bonds), funds can be invested in private companies, infrastructure projects, and renewable energy sources such as solar and wind farms. Since 2022, tax incentives for personal income have further encouraged investments in these funds.
Stock purchases – High potential, but also greater risk
Investing in the stock market can yield significant returns through the appreciation of stock values and dividend payments. This investment method offers the opportunity to share in the growth of leading companies. However, market volatility carries the risk of losing invested capital, and successful investing requires knowledge, patience, significant time commitment, and careful monitoring of market trends. Those interested in investing in stocks should be prepared for price fluctuations and have a long-term investment perspective.
When deciding on an investment strategy, it’s important to consider personal financial goals, risk tolerance, and the investment horizon. Smartly combining different investment options and spreading investments through alternative funds can strike a balance between safety and returns, tailored to your individual needs.
