How does micro-investing work?
Micro-investing is about making small and irregular investments from everyday transactions. Micro-investing apps round-up your purchases to invest your spare change. For example, a large cappuccino at $4.50 will be rounded-up to $5 and the 50 cents would then be invested. Depending on how frequently you transact and how the market treats you, over time you could accumulate a sizeable nest egg.
Why are some investors flocking to micro-investing apps?
There are a number of reasons investors are attracted to micro-investing apps.
No deposit needed
Traditionally to get started with investing an initial deposit is required, and this can be anywhere from $500-$5000. Although, with the inception of micro-investing the playing field has been levelled, and with as little as $1 you can start investing. Some platforms don’t require a deposit at all.
Related article: How to start investing with nothing?
Convenient and easy
Apps by their very nature are generally easy and convenient to use, and micro-investing apps are no different. Right off the bat, by rounding up your transactions you are able to invest with virtually no effort required. Additionally, with most apps, setting up takes minutes and from there you can view your investment options and track your portfolio.
Not sure what to invest in? Most micro-investing apps invest in exchange traded funds or index funds, and to get you started most app can pair you with an investment portfolio based on your risk tolerance.
The downside to micro-investing
You could get better returns elsewhere
Micro-investing apps don’t suit all investors. If you are a confident investor who has been around the proverbial investment block a few times now, you may be disappointed by the returns you receive from micro-investing apps. Engaging with a fund manager, or picking your own stocks or ETFs could result in better returns. Additionally, if you have an established portfolio, micro-investing may not provide any additional diversity or exposure to any new or hard to access investment products.
Micro-investing Apps Available in Australia
At the time of writing there are two spare-change micro-investing apps available in Australia: Raiz and First Step. Other micro-investing app are Spaceship Voyager and CommSec Pocket. Although these app don’t invest your spare change, they do allow you to make small investments and choose between different diversified portfolios.
What are the fees?
Fees can make a substantial difference to your returns, so it is important to consider the costs involved in micro investing. At the time of writing, spare change micro-investing app Raiz charges $2.50 per/month on a balance under $10,000. First Step charged a flat fee of $1.25 per month for balances under $5000. For balances above $10,000 for Raiz and $5,000 for First Step, the fees change to 0.275%. In other words, for a $10,000 investment you’d be charge $2.75 a month. On the other hand, if you’ve got an investment of $100, you’d be charged $1.25 per month which is a 1.25% fee. The silver lining – it’s an incentive to continue to grow your investment and maybe make regular contributions to top-up your balance.
On the other hand, at the time of writing, Spaceship Voyager does not charge any fees for balances below $5,000. For balances over $5000, however, the monthly fee will be 0.05% or 0.10%, depending on the investment portfolio you select.
When you trade through the CommeSec app, you’ll pay $2 each time you invest or sell up to $1,000 and trades over $1,000 are charged at 0.20% of the trade value. For example, a $1,100 trade will cost you $2.20 ($1,100 x 0.20%).
Also, bear in mind you will likely face ETF management fees which will likely be charged by the ETF or index fund provider and can vary. Make sure you read the PDS before investing.
Spare a thought
If you are looking to start small and perhaps ease yourself into investing, then micro-investing is an option. It can give you a good feel for investing without playing with large sums of money. However, before deciding on any investment product, consider the risks involved, make sure you do your research and always thoroughly read the PDS.
Cover image: Yulia Grigoryeva (Shutterstock)
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