Low risk, high risk and guaranteed returns when investing under $5,000
If you’re planning to take a leap into the world of investments and put your hard earned money at stake, it is important that you take some time to learn about how different alternatives work and which ones might suit you best. There are low risk options, where you can get moderate returns with relatively safe investments, high risk options for larger returns at added risk and guaranteed investments that will always make money.
This guide explains these investment options for amounts of $1,000 to $4,999, how to distinguish between different types of investments such as shares, options, futures and managed funds, and what you need to know about minimum amounts, commissions and fees.
What are my options when I want to invest $1,000 - $4,999?
- Invest in managed funds - If you'd prefer to leave the investment decisions to the professionals, managed investment schemes may be a good choice. You put your money in a pool with other investors, and an experienced investment manager puts the funds to work on your behalf. The value of your investment rises and falls with fund performance, and when it goes well you receive a cut.
- Pay off existing debt - Use some of the money to pay off existing debts such as outstanding credit card balances and other kinds of loans. This is because the sooner you pay off your debts, the less you pay in interest. Find out if you'll be on the hook for any early repayment or exit fees if you repay it ahead of schedule and see how much you're saving. Paying off a debt sooner can mean more money in your pocket, and it might be worth putting some of your windfall towards refinancing if you're under debt.
- Make a contribution towards your super - Add funds to your super while you're still young and watch it grow over the years. When you make contributions to your super from after-tax income, the government does not tax the contribution up to a certain threshold because it’s already been taxed. If you earn less than $50,454 annually as your pre-tax income and you end up making post-tax contributions to your super, the government adds to your super by matching your contributions.
- Invest in shares - When you buy a share, you’re basically becoming the owner of a single unit of any given company. The Australian Securities Exchange lists more than 200 businesses and you can buy shares for all of these. Share market investors can earn profits when share prices increase, and they can be paid dividends when the company generates profit.
- Invest in options - Investing in options lets you control and capitalise on price movements of shares and other assets when you don’t actually own them. Options tend to terminate in a matter of weeks or months, which is why their prices are normally low. If you’re considering going the options way, make sure you know what you're doing for an increased chance of higher returns.
- Invest in futures - Investing in futures brings a strong element of leverage. With only $2,000 on hand you can control futures contracts of more than $30,000. If you're thinking of doing this way it's advisable to hold some money in reserve in the event of margin calls. You have make larger investments than your funds might otherwise allow, but might end up losing even more than you originally invested.
- Trade foreign exchange - Trading in foreign currencies offers considerable leverage, but can also magnify losses. Some of the main advantages of forex trading are that you don’t need much money to get started, it's relatively easy for beginners to pick up, and you can make small and then make bigger investments when you get the hang of it.
Get guaranteed returns with savings accounts and term deposits
If you’re looking at guaranteed returns, both high interest savings accounts and term deposits are worth your attention as both will continue to earn interest as long as you have money in your accounts. Term deposits will require you to lock away funds for some time, but high interest savings accounts let you access your money as needed.
What about cash management accounts?
Some financial institutions provide cash management accounts. These let you simultaneously manage multiple investment accounts on an integrated platform while earning interest on your savings. Some providers will also let you open a cash management account with self managed super funds such accounts.Back to top
What are the pros and cons of saving accounts?
- Government guarantee. If you put your money in a savings account or a term deposit, the Australian Government Guarantee Scheme Security covers you in case your bank fails to honour the deposit. This guarantee applies on deposits of up to $250,000 per person per institution, and does not limit the number of institutions you can bank with.
- Returns guaranteed. A savings account comes with virtually no risk, especially if you have no more than $250,000 with any one financial institution. The money in your account continues earning interest as long as it's in there. Credit unions tend to offer more competitive rates than mainstream banks because they don’t have the added costs associated with shareholders. Online banks, because they don't have to spend money on physical stores, also tend to offer competitive rates. Some financial institutions provide bonus interest to account holders who meet given criteria.
- Flexibility. Savings accounts come with varied features. While some let you access funds via online and phone banking, some others provide access to BPAY as well. Some savings accounts designed especially for children or for retirees can offer preferable interest rates, all while ensuring you have around-the-clock access to your money.
- Limited returns. Despite offering guaranteed returns, the interest you earn from such accounts can be noticeably lower than what you may earn through other types of investments. The interest rate of Australian savings accounts is normally between 2% to 3.5%.
How do I compare investment products?
- Minimum investment amount. If you’re considering getting into the share market, you can start with just one share. You can start trading foreign currency with no more than $25, and can also start trading in futures with little investment. To open a term deposit, you may have to start with a minimum of $500 or $1,000, depending on the financial institution you choose.
- Commissions and fees. If you plan to deal in shares and futures, there may be brokerage and other fees. Full service brokers normally charge fees as a percentage of any given trade value, and some online brokers charge fixed fees per trade. For assets like term deposits and high interest savings accounts, financial institutions tend not to charge any account keeping fees. Percent-based fees are often more suitable for smaller trades, but if you'll be making larger investments it might be preferable to find an account with flat fees.
What are the risks?
- Inadequate information. No matter where you plan to put your money, carrying out a little groundwork is important. Investing in shares, futures and options comes with varying risk levels so understanding where your money goes is important. Even with simpler assets like savings accounts and term deposits it's still a good idea to do your research because banks offer different interest rates.
- Fees. Investing requires that you work with a financial institution or a broker. Both may charge fees to provide services, and it’s important that you know how much they may charge in different scenarios, and consider these costs alongside the potential returns of an investment.
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Is there anything else I should consider?
- The risk factor. Every investor should start by understanding the link between risk and returns. General opinion is that high risk investments tend to offer greater potential returns. What’s also true is that how people perceive risk can vary, and perceived risk does not necessarily reflect upon statistical analysis. You may want to avoid following your instincts until you've checked it against the facts.
- Your risk profile. Your risk profile essentially refers to your willingness to take risk and how it can have an effect on your ability to make decisions. Risk profiling gives investors the means to recognise investment pitfalls with consideration to their own capacity for and tolerance of risks. If you're a naturally cautious person or a natural risk-taker it's important to recognise these qualities in yourself.
- Financial goals. Set yourself clear and measurable financial goals so you know whether your investments are on track to get you there. For example, you might be planning to have a specific amount by the time you retire, and can adjust your investment habits to stay focused on this.
Frequently asked questions
What’s the risk of investing in shares?
You’ll lose money if share prices fall, and it's possible for them to go all the way down to zero. If the company you invest in goes bust, shareholders are often last in line to receive any money. Since share values can vary periodically, you cannot expect fixed dividends.
Does borrowing to invest work well?
Borrowing to interest, also referred to as gearing, can be risky. While it can increase your returns in favourable market conditions, the reverse holds true as well. Ideally you'll only go this way if you know your after-tax returns will exceed the cost of borrowing.
I have $4,000 in savings. How much of it can I afford to invest?
Before you start investing make sure you have your debts under control. Paying off debts is always a sensible financial move while investing is a riskier. Keep money aside for emergencies, the equivalent of about three months of household expenses is a good amount, and consider making sure you have adequate insurance cover as well to reduce the risk of losing it all if something goes wrong. With these taken care of, you can start investing in diverse asset classes. Consider making some practice trades and trying out different markets until you've found one you can call home.