Most of us have heard about buy now, pay later services such as Afterpay and PayPal Pay in 4 which let you purchase an item without paying for it in full upfront. Robo adviser InvestSMART has put a spin on this by introducing fundlater, which it describes as Australia’s first Invest Now, Fund Later investment service.
According to InvestSMART, fundlater is “a low-cost savings plan designed to overcome some of the hurdles of saving”. It lets you diversify your investment and seek to build wealth with a larger amount than you put down from day one. “It’s the nudge some Aussies have been looking for to grow their wealth. A simple savings strategy where they set up regular instalments to pay their investment off while at the same time staying invested in the market to help compound their returns,” said InvestSMART’s Chairman, Paul Clitheroe.
How does fundlater work?
You need to have an initial deposit of at least $4,000 to open an account and InvestSMART will lend you up to $6,000. That $10,000 will then be invested in a portfolio of Exchange Traded Funds (ETFs). You’ll have to repay the loan in 20 monthly instalments of $320. The repayments each include a $20 “facility fee”.
If you have an initial deposit of more than $4,000 you can still borrow $6,000 – you’ll just have more money to invest. For example, InvestSMART says you can fund with $7,000 and be credited $6,000, therefore investing $13,000. Assuming you borrow the full $6,000, your repayments will still be 20 monthly instalments of $320.
Where is my money invested?
You can choose between four diversified portfolios of ETFs offered by InvestSMART – Conservative, Balanced, Growth and High Growth.
The right option for you will depend on your tolerance for risk, as well as the investment time frame you have in mind. For example, according to InvestSMART the Conservative portfolio is suitable for investors with a low tolerance for risk looking to invest for two to three years, while the Growth portfolio suits those with a high tolerance for risk looking to invest for five to seven years.
You don’t have to stick to the same portfolio the whole time. During the first 20 months you can move within the four diversified portfolios. For example, you may have started in the Growth portfolio but six months on want to move to Balanced.
After 20 months you can move your money to any of the portfolios InvestSMART offers.
What returns can I expect?
The table below shows the performance of each of the four portfolios over one, three and five years. Of course, keep in mind that past performance is not an indicator of future returns.
How the portfolios have performed
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|Diversified portfolios||1 year||3 year (%pa)||5 year (%pa)|
|InvestSMART High Growth||24.96%||10.37%||10.67%|
Source: InvestSMART. Returns as at 31 August, 2021.
What does fundlater cost?
There is a $20 monthly facility fee to use the fundlater service, which is built into the monthly repayments. Over 20 months, this will cost you $400. This equates to 6.67% of the $6,000 you can borrow. If you pay out your loan early, though, the total fee will be lower.
You will also have to pay management fees on your investment portfolio. These start at $99 a year for investments between $10,000 and $18,000 and are capped at $451 a year for any investments over $82,000.
InvestSMART also notes that its external broker charges the greater of $4.95 per trade or 0.099% of the value of the trades to buy or sell the securities within your portfolio.
It’s also worth noting that ETFs charge their own fees. The underlying ETF fees range from 0.09% to 0.30% per annum.
What happens if I miss a repayment?
If you don’t make one of your monthly payments, InvestSMART will send you a number of reminder emails in the days following the missed payment. If you have not made a payment 10 business days after the due date, all securities within your portfolio will be sold.
If you think you won’t be able to make a payment by the due date, it’s best to contact InvestSMART.
Can I make extra repayments or pay off the loan early?
Yes, you can pay off more than $320 a month or add in ad hoc payments when your budget allows. If you repay the entire $6,000, you’ll no longer have to pay the $20 facility fee each month.
What if I need to take my money out early?
You can close your account at any time. InvestSMART will sell down your portfolio, deduct any outstanding instalments left to pay and return the remaining money to you. If the sum of remaining instalments is greater than the value of the investment portfolio, you won’t receive any money but, on the plus side, you won’t owe InvestSMART anything either.
“Lowering the risk of borrowing to invest is the hallmark of fundlater; even if the value of the investment portfolio falls below the outstanding fundlater loan balance, you will not owe any additional money even if you wanted to cancel fundlater early,” InvestSMART CEO, Ron Hodge, explained.
What else should I know?
It’s important to remember that this product is a loan, and when you borrow to invest you can not only potentially magnify your returns but you can also magnify your losses.
It’s worth noting, though, that this is not a margin loan and there are no margin calls. It is a non-recourse loan which essentially means that you can’t lose more than your initial deposit and any instalments paid.
That said, investing is not without its risks. It’s important to be aware that markets do move up and down and you could potentially lose money.
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