Micro-Investing

Updated on 2023-08-29T12:01:52.193599Z

What is micro-investing?

Micro-investing is making small investments over a long period. It is an investing strategy where one invests minimal amounts as per own pocket's budget. Investors can add small amounts of money to their portfolios as often as every day. Often micro-investing strategies run on apps or other programs using investors' debit cards. Most micro-investing platforms use mutual funds and ETFs to create a diversified portfolio of stocks and bonds. 

Frequently Asked Questions (FAQ)-  

How does micro-investing work?

Micro-investing allows investors to put in small savings. For example, investors can use a micro-investing app that rounds up the dollar amounts on purchases an investor makes using his payments card. Here extra cash is diverted cash to an investment account or a savings account. 

Using the app on their phone, investors can enter required personal information, including banking and card details. Then, questions designed in the app helps determine the type of investments suitable to investor's goals and risk tolerance. Some apps also use algorithms to determine risk profiles. The micro-investing app then makes recommendations on how and where to invest. Some popular micro-investment apps in Australia are Spaceship, Voyager, and Raiz.

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Example-

Fatty spends AU$10.75 at lunch. He has a micro-investing app on his phone, which is active. Now, the app rounds up Fatty's purchase to the nearest dollar (AU$11) and transfers the remaining AU$0.25 to an investment account. Once Fatty's rounded-up balance is large enough (say AU$5 or 10), He can then use that money for investment. Sometimes the investing app might make purchases automatically based on Fatty's investment profile.

Fatty will have an option to choose investments that align with his views. He might also have the option to set up a recurring allocation (daily, weekly, or monthly) into his investment account. Fatty may even choose to contribute to a superannuation account with the help of an investment professional.

Personal finance apps such as Acorns and Stash also provide debit cards that automatically round up purchases and invest the additional money into ETFs or fractional shares.

The strategy of consistently investing savings into the stock market has proven profitable over a long period. Consistent share purchases mean investors are buying more shares at lower prices and fewer shares at higher prices.

What are the micro-investing options available?

The most common micro- investment options available are ETFs and Managed Funds. ETFs, seek to replicate market indexes and are passive by nature.

On the other hand, managed funds consist of stocks hand-picked by a fund manager. Consequently, they have higher management fees since they utilise the expertise of the fund manager.

Often only diversified investment vehicles are offered by micro-investment apps. Diversification ensures that investors have maximum exposure to numerous assets. It increases the likelihood of higher portfolio performance and reduces risk from one sector.

What are the benefits of micro-investing?

Benefits of micro-investing are-

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• Allows minimum investments:investors can start with small sums being invested even if they don't have much money. Only a few dollars are enough to start making investments in ETFs and fractional shares. It is not possible with more traditional investment methods like mutual funds, which have a minimum investment requirement.
• Easy to start- investors can start using an app on their phones and own debit/credit cards. The apps are often user-friendly and not complex like other financial software.
• Benefits of diversification: Investors can invest in low-cost ETF tied to a market index or build their portfolio. They can choose the amount of risk exposure and diversification they want in their portfolio with just a few dollars.
• Sums up the small amount spent: Micro-investing concept works on summing up small balances of change remaining from payments made. Consistently contributing even small amounts to an investment account potentially turns the extra change into thousands of dollars over time.
• Automated investing option: Micro-investing platforms allow users to set automated instructions for amount transfer and investment. An investor can automate the entire investing process. It becomes easier for people to continue investing evenly during good and bad times.
• Develops a savings habit: Micro-investing helps create a habit of saving. All the extra bit of cash is invested right away. It makes the investor conscious about the extra bit. Even pennies can thus turn into big savings/ investments.

What are the cons of micro-investing?

Cons of micro-investing are-

• Not enough for big goals like retirement: Though micro-investing is a great way to start investing, especially for youth, it isn't enough to get the kind of savings required to lead to an easy retirement. Unlike other investment options, it cannot become an income source for investors. They will have to continue this alongside a regular income source.
• Disproportionate fees: Micro-investing platforms do charge monthly fees. The charges vary across different plans. Charges are not much, but if a user cannot contribute proportionately, it becomes a loss-making deal for them. No one would wish to pay more than they save or earn.
• Limited investment alternatives- A standard brokerage account offers options for investing in stock, bond, ETF, and others. The investor can explore even complex securities and derivatives. But this is not the case with micro-investments. Most micro-investing apps only provide a list of mutual funds and ETFs as investment options. Investors cannot choose something outside their lists.

What are the things to consider before micro-investing?

Here are the top things to be considered before going for micro-investing.

• All apps are not created equal- They come in different forms with varied costs. An investor needs to know the fee information thoroughly before choosing micro-investment.
• Verify the platform providers' registration- It is essential to check if the firm is registered. It is a basic need to be aware of frauds used in this tech age.
• Understand fee structure- Investing app fee structures vary. What you pay depends on the type of services availed. Before choosing one platform, investors must explore other apps as well.
• Beware of unintended charges- In case of automatic debits, investors must keep an account of the charges deducted from the account.