If you are wanting to get started with investing, chances are you have come across the term ‘micro investing’. In this article we will walk you through what micro investing is and what you need to consider before diving in.
What is Micro-investing?
Micro investing is a relatively new concept that refers to the ability to invest loose change in the share or cryptocurrency markets. This is done via online platforms and mobile phone apps that enable you to connect your bank account to the app and facilitate one-off or recurring direct debits into your investment account. You can then choose your investment options and set up your preferences regarding how much and how often you wish to invest.
How does it work?
Each app can work in a slightly different way. Some act as brokers, allowing you to choose the shares you wish to buy, while others operate more as a managed fund – they give you a selection of investment options to pick from and then pool your money together with that of other investors.
What are the pros?
The main pros of micro-investing apps are that they can allow you to get a feel for investing without having to risk large sums of money, it is easy to get started and the apps are typically user friendly.
What are the cons?
While these apps have their benefits, they also carry risks in addition to those that come with most investments. Depending on the amount you are investing and the frequency, these apps can work out to be more expensive than if you were to invest the money directly through a broker. You can have a limited number of investment options, limited cooling off rights, as well as the risk for the company behind the app to go out of business or for the funds to be mismanaged. Living in the age of technology means that the number of online scams is on the rise, so it is especially important to do your research and look beyond the slick marketing of tech apps.
Here is what to consider when researching micro investing apps
As it is new technology, there are currently only a handful of micro investing platforms in Australia to choose from. Nonetheless, it is important to give consideration to the below factors before deciding which app (if any) is right for you.
What are your investment preferences?
Before you begin your research, start by considering why you are wanting to use a micro-investing app. Think about how much you wish to invest, how often you plan to invest, whether you have a preference regarding index funds or investing money in Australia and/or overseas, as well as your investment timeframe (even though it may be loose change always heed the rule: don’t invest money you can’t afford to lose).
What are the investment options?
Make sure that you have a clear understanding of what each investment option entails and where your money will be invested, and that this is aligned with your investment preferences that you identified above.
What are the fees?
Check how often the fees are charged (and whether they include the costs of the underlying investments) and compare this to other apps or managed funds available in the market. Let’s say you have $800 to invest and are considering an Australian Shares ETF or a micro investing app. To invest in the ETF for the first year costs you $20 to place the trade plus 80 cents in ETF management fees (assuming 0.1% fees on $800 investment), totalling $20.80 in the first year. The app might charge you $4 a month (including the ETF fees), costing you $48 in the first 12 months. As you can see, in this instance the app can be twice as expensive as investing directly yourself. On the other hand, if you wish to invest $100 each month then using the app can be cheaper than paying 12 lots of $20 brokerage fees.
Do they hold an AFSL?
Take a look at the Product Disclosure Statement (PDS) and check that the app provider holds an Australian Financial Services Licence. Don’t just rely on the number listed in the PDS – visit the ASIC website to search for the licence number and make sure the details match.
Who is the custodian of the fund (in other words, legal owner of your investments)?
The use of a Custodian provides a layer of protection because it means that the app provider does not hold your money. Therefore, if that provider fails or goes out of business, your money doesn’t disappear along with them.
What is the process and timeframe for withdrawing your funds?
Make sure that you understand and are comfortable with the process of withdrawing your funds, as well as checking any fees and tax implications associated with the withdrawal.
While micro-investing apps are growing in popularity due to their convenience and reduced barriers to entry, keep in mind that they are not for everyone. Before making the decision on where to invest your hard earned cash, make sure you consider your long and short term needs, risk appetite, and investment preferences. For a helping hand in deciding whether micro-investing apps are the right fit for you, click here to book a complimentary video consultation.