How to start investing ethically for less than $1000

Investing in ethical funds on a budget is a lot easier than you think.

Let's say you've got $1000 sitting in your bank account and you're thinking about how you can make the most out of it. You check your inbox and find a special offer for a phone upgrade for the same amount. But then again, you just finished reading a news article about some company dumping waste into the ocean and it made you think about how you, as an individual, can help protect the planet.

One way you can do this is to put your savings in investment products that factor in the environment. There are managed funds and exchange-traded funds (ETFs) that offer this strategy and the good news is that you can invest in them for $1000 or less.

"It's easier than ever before to start with a small amount of money," says Dave Rae, a certified financial planner at Federation Financial who specialises in impact investing (another type of "ethically-minded" investing) strategies.

Rae says there's a broad range of product choices out there and the minimum investment has come down to a point where you can even dip your toes in the market for as low as $500.

Kirk McNeill, client services manager at Australian Ethical Investment, says that they even provide would-be investors with a pay plan that works with their budget. For example, they can put in a minimum investment of $500 and make a regular direct debit or BPAY top up of $100 a month or $25 a week.

"This has been really popular especially for parents or grandparents who want to set aside a bit of savings for their children or grandchildren," says McNeill.

But the strategy can also work for young professionals because the company allows them to withdraw their funds at any time or close them and then re-activate when they want to invest again.

"Investors can withdraw their money as they need. All we ask is that they fill in a withdrawal request form and we transfer their funds in three business days," he says.

The company's formula has struck a chord with investors. Australian Ethical's customer base has gone up 20% to 57,800 across their superannuation and managed account products.

And just because you're choosing to invest ethically doesn't mean you're sacrificing the returns. Rainmaker Information, the publisher of Money, found that in a study of the top-performing investment products in the three years to June 2020 (with a minimum investment of $1000 or less), the number one performer based on returns was the BetaShares Global Sustainability Leaders ETF which gained 21.5% per year.

Vanguard International Shares Select returned an above benchmark 11.4% while Australian Ethical, which manages three of the five products that make up the top five, delivered 14.8% (Emerging Companies Fund), 8.8% (International Shares Fund) and 7.3% (Australian Shares Fund) per year.

Rae says that if an investor really wants to fine tune their investment to a specific set of criteria, they can also check out a research site called responsiblereturns.com.au. From there they can select the top themes they support (for example, sustainable water, renewable energy, etc.) and what particular stocks they want to avoid (tobacco, gambling, etc.). The site can then provide them with the name of providers that can offer products based on those screening criteria.

"The fund managers are putting a lot of good information on their website. They're not just providing the details on their financial performance, which are important, but also the non-financial investment information which are important for the investors," says Rae.

Here are the six steps to follow if you want to invest in ethical funds on a small budget:

1. Check out responsiblereturns.com.au and use "Find a Product" to find the best match for you based on your screening criteria

2. Check out the website of the fund managers you're thinking of using and find out what the minimum investment is. Have your personal information handy in case you need to set up an account.

3. Find out if there are upfront fees, joining fees, penalty fees and whether they can take the fees from your investment returns.

4. Check out the "management cost" and whether this is something that you pay upfront or taken off the investment returns.

5. Ask them if there are any fees you need to pay in case you need to withdraw part or all of your funds.

6. Set up a regular top-up payment so you can grow your investment into a sizeable nest egg. The number of products you can invest in increases once you have at least $25,000 as a minimum investment.

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