What is micro-investing?

When micro-investing platform Raiz (previously Acorns) launched in Australia in February 2016, it heralded the beginning of a revolutionary new way for Australians to invest their money. Micro-investing involves investing very small amounts of money on a regular basis, with the hope that over time, every little bit you invest adds up to a lot.

Today, dozens of apps similar to Raiz have popped up around the world, a clear indication that micro-investing is a popular option among the next generation of investors. But how does micro-investing work and what other options are there today in Australia? Let’s take a closer look.

What is micro-investing?

Micro-investing allows you to invest small amounts of money to help build an investment balance. The basic premise is simple. If you frequently make small contributions over time into an investment portfolio, you have the potential to earn more than you would if you saved it up as cash in a savings account.

Not every micro-investment platform works the same way. While some apps let you invest smaller amounts than is normally allowed into the stock market, others work by investing your spare change from everyday purchases when you link your bank account.

Example of spare change micro-investing. Let’s say you purchase a coffee for $4.60 with your debit card. The total purchase amount will be rounded up to $5, with the excess 40 cents automatically diverted into your investment fund. While each small amount doesn’t sound like a lot on its own, it can add up over time to a much more sizeable investment balance. If you wish, you can also set up a regular recurring investment or deposit lump sums into your investment fund whenever you come into any extra cash.

The funds in your investment account are then invested into low-cost exchange traded funds (ETFs) or a portfolio of shares. In this way, even people who may not think they have enough disposable income to invest can start building an investment portfolio. You can then monitor your account balance through a smartphone app or by logging in online.

Who may be suited to micro-investing?

Micro-investing is a suitable option for anyone looking for a cheap and convenient way to start building an investment portfolio. However, because micro-investing requires a long time frame in order to build up any significant wealth, they may be more suited to a younger demographic.

It's also important to be aware that there are costs to micro-investing which may eat into what you're saving or getting back in returns. It's important to double check fees with the performance of the app's chosen investment portfolio. For example, if you're only investing $5 per month, the total fees are $2.50 per month and the returns are less than 1% per month, you're probably better off sticking to a savings account.

The fees. There are any number of fees that a micro-investment app may charge. Some of the most common include:

• Brokerage fees. The cost each time you make a transaction or invest.
• Subscription or management fees. An ongoing monthly or yearly fee to keep the account open.
• Other fees. Additional costs may include cancellation fees, withdraw fees, transaction fees and account opening fees.

That said, you don’t need to be a millennial to take advantage of the benefits of micro-investing. In short, anyone who thinks they might benefit from the convenience of an automatic investment plan should consider the benefits of this approach.

Which providers offer micro-investing in Australia?

Micro-investing is still a relatively new sector on the Australian financial scene. So at the time of writing there are only a few micro-investing platforms up and running. Raiz and FirstStep are the only two spare change apps, however there are others such as CommSec Pocket and Spaceship Voyager, which let you invest small amounts at a time into the stock market.

You can learn the basics these apps below, but keep an eye out for other fintech startups looking to break into the market in the coming months and years.

Raiz Invest

Raiz is a mobile app that rounds up the spare change from your daily purchases and invests the excess into a diversified portfolio of ETFs. There are six different portfolios to choose from based on your appetite for risk and you can also set up recurring payments or make lump sum instalments.

There are no minimum account balances and deposits and withdrawals are free. All you need to do to get started is provide your bank account number, BSB number and online banking login details.

Account balances of less than $10,000 attract a monthly maintenance fee of $2.50. Balances of $10,000 and above attract a monthly fee equal to 0.275% of your balance.

FirstStep

FirstStep is a mobile app that allows you to automatically invest loose change from your day-to-day purchases. You can also make voluntary contributions from your income or set up a recurring transfer.

Your funds are invested in a low-cost, diversified portfolio of ETFs spread across Australian shares and bonds, US shares and world shares. There’s no minimum investment limit and you can choose from three different portfolios tailored to suit your risk appetite, with the option to link up as many bank accounts and cards as you want.

Account balances under $5,000 attract a $1.25 monthly fee, while accounts of $5,000 and over incur a management fee of 0.275% per year, plus an addition expense fee of 0.2% per year.

CommSec Pocket

With the CBA's CommSec Pocket app, you can invest as little as $50 at a time into an ETF of your choice with a brokerage fee of just $2.

There are 7 investment themes to choose from – and each of these are individual listed ETFs. This means it lets you directly invest in an ETF of your picking.

It doesn't collect spare change, however it lets you directly invest a much smaller amount than you're normally able to. When you directly invest in shares or ETFs using an online broker, there's typically a minimal initial trade requirement of $500 to $1,000 and brokerage fees upwards of $10 - $30.

Like the others, you can either set it to make regular monthly or fortnightly payments, or you can make one-off payments as you like.

Spaceship Voyager

Spaceship Voyager is a robo-advice platform that lets you transfer small amounts into an investment portfolio without the need to pay for a financial advisor.

There are two portfolios to choose from – the Spaceship Index Portfolio and the Spaceship Universe Portfolio – both which invest your funds into a mix of Australian shares, global shares and cash.

Plus, you can set up regular top ups each week, fortnight or month and there are no contribution fees, brokerage fees, withdrawal fees or exit fees charged for either portfolio. There are however, management costs (0.5-0.10%) which are taken as a percentage of your portfolio's value once it hits higher than $5,000.

Micro-investment app comparison

Benefits of micro-investing

There are many potential benefits of micro-investing, including:

It’s easy

• It’s quick and simple to set up an account with a micro-investing platform and link it to your bank accounts. It then acts like a sort of electronic piggy bank for your spare change.

It’s convenient

• Micro-investing requires minimal input on your part. Because the entire process is automated, you can start building an investment balance without even realising it.

You can start a savings habit

• By getting into micro-investing from a young age, you can create positive saving habits that will last a lifetime. It’s a very effective way for Australians who have never invested their money before to make a start.

Minimal investment required

• You don’t need a huge bank balance to take advantage of a micro-investing platform. You can start by investing your small change and then watch your balance grow.

Choose from diversified portfolios

• The money in your investment fund can be balanced in a diversified ETF portfolio based on your financial goals and your appetite for risk. You don’t need to be an investment expert or have specialised financial knowledge.

What are the risks of micro-investing?

Like any other investment option, micro-investing also comes with a certain level of risk. There’s no guarantee that the investment portfolio you choose will perform as you hope, and you could end up losing money. The investment portfolio recommended for you is chosen based on your risk tolerance, so, depending on your financial goals, you have the option to minimise your risk exposure.

It’s also worth pointing out that micro-investing platforms don’t offer their services for free. You’ll need to pay an account management fee that’s either a flat fee or calculated based on a percentage of your account balance, while brokerage and ETF management fees also apply when you purchase ETFs through your account.

These fees may also differ depending on your account balance, so it’s important to monitor your account regularly to make sure the fee structure continues to work in your favour.

The last thing to remember with a micro-investment account is that because the investing takes place in the background, it can sometimes be easy to forget about your account. While this can be a good thing for those investors who might be tempted to “over-manage” their savings, it’s still important to regularly review the performance of your investments to ensure that they are meeting your expectations.

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