How to start investing with small amounts

This report is sponsored by GPS Investment Fund Limited. It was independently researched and written.

New to investing and confused by the stockmarket? Having limited funds to invest doesn't have to be a roadblock to getting started.

In the face of it, investing is easy.

You put your spare cash into an investment, then steadily add to it over time, allowing your investment to compound and grow.

So far, so good. Where theory collides with reality is the notion of 'spare cash'.

Having battled a cost-of-living crisis for the past few years, plenty of people don't have a lot of surplus cash.

According to Finder's latest Consumer Sentiment Tracker, two in five (43%) Australians have less than $1000 in their bank account.

It's not an issue limited to low-income earners. Twenty-five per cent of households earning between $100,000 and $250,000 annually have less than $1000 in their bank accounts. This can be a real stumbling block when it comes to investing.

Shares and exchange traded funds (ETFs) may require a minimum initial investment of $500 (plus brokerage).

Managed funds may have an initial outlay as low as $1000, but you'll typically need about $5000 to get started, potentially more.

Not surprisingly, Shelby Clark, chief operating officer at GPS Investment Fund, says, "In Australia the biggest hurdle to investing isn't motivation, it's access. Many funds still ask for $10,000 or more before you can even get started. For younger Australians and first-time investors that's a brick wall."

Busting the 'big money' myth  

Along with the reality of high capital requirements, it's common for Australians to view investing as something that calls for significant sums of money.

According to HSBC's latest Investor Insights Survey, younger Australians believe that it takes more than $20,000 to start investing (Gen Z $20,840 and Millennials $20,275).

The reality couldn't be further from the truth. Quite simply, you don't need a huge lump sum to start growing wealth through investing.

The barriers are breaking down

As Clark notes, "For too long investing has looked like an exclusive club with rules and thresholds that kept most people out. Once the barriers are gone, people can begin earlier, build habits and stay invested. That is what changes behaviour."

Vince Scully is the founder of financial advice service Life Sherpa. He says the past 40 years have seen the cost of investing fall dramatically. "The internet and social media, in particular, have democratised investing."

Even so, Scully believes that in many cases, this has only made it easier to make poor decisions faster, cheaper and more conveniently. The key to success, he believes, is getting started.

"Get invested, stay invested, then invest some more - consistency matters," says Scully.

Is micro-investing the answer?

Investments are available that allow beginners to dip their toe in markets and steadily build confidence.

Platforms such as Raiz, Pearler and Sharesies, provide access to ETFs and, in some cases, individual shares.

"There is clearly a market for micro-investing," says Scully. "Making the leap from saving to investing is easier if you can do it with a smaller sum - you don't have to wait until you have thousands to invest."

Micro-investing platforms can let investors get started with as little as $5, although there can be downsides to this.

Platform fees mean it isn't always financially viable to invest very small amounts. Raiz, for example, charges fees of $5.50 per month for accounts with a balance of less than $26,000. Very low balances could easily see any gains wiped out by platform fees.

In addition, micro-investments typically focus on sharemarkets. And that's not where every investor wants to be.

The good news is that there are investment managers who offer low-capital access to other asset markets.

An alternative solution

GPS Investment Fund recently launched its new fund - Arkus. It's a private credit fund, meaning investors' money is pooled and invested in registered first mortgages over residential development projects in south-east Queensland.

"Basically, we fund developers who then build units and townhouses," says Clark.

"Arkus invests in the mortgage on the land (in first position). This is then repaid when the developer sells the units or townhouses. We sit first in line for that repayment over any other loans associated with the project. So, you're investing in real property - not intangible shares or crypto coins."

There is nothing new about private credit, which is essentially non-bank lending. However, this is an asset class that has seen investor interest surge in recent years.

Reserve Bank data shows the Australian private credit market is currently worth around $40 billion.

A key point of difference of Arkus is the minimum investment requirement of $1 in a market where investors are typically asked to stump up a lot more.

"We wanted to get rid of the biggest barrier, which is the minimum investment," says Clark. "We wanted something steadier than shares, not as time-consuming, and without such a high entry point.

"We created Arkus to break that barrier so that anyone, whether they have one dollar or 10 thousand to invest, can start putting money into something real."

Unlike many micro-investing platforms, where investors only have beneficial ownership, Arkus investors have both legal and beneficial ownership of the underlying mortgages. "It is full ownership, not half measures," says Clark.

Arkus offers an expected net return of 6.50%pa. The fund doesn't charge investors fees as the fund manager's expenses are paid by the underlying borrowers.

According to Clark, Arkus is best suited as a medium- to long-term investment "because compounding works better the longer you stay in."

She adds, "It is not about hype or fast wins. It is about steady returns and being accessible."

Investors are keen to start small

According to Scully, young Australians are keen to start investing. "They are used to being investors from a lifetime of compulsory super, which has turned us all into mini fund managers responsible for our own retirement."

That said, Scully believes many may struggle with the first step. "Previous generations were unable to make this leap into investing so early, and many never made it, sticking to bank deposits or paying off their mortgages."

For some Australians, micro-investing is an alternative to home buying. As Scully observes,

"For others, it is the path to homeownership."

Clark also recognises the need for flexibility.

"Investors in Arkus can request redemptions monthly," she says. "That flexibility matters, especially for younger Australians who lived through Covid and the global financial crisis. They know how quickly things can change. Locking their money away never felt fair. Flexibility makes it easier for people to get started."

Not just about younger investors

While it's easy to assume that low capital investments are pitched at, or appeal to, younger investors, that's not always the case.

Clark says, "We expected Arkus to appeal mainly to 18-35-year-olds who wanted to build wealth but couldn't meet the usual minimum investment limits. Once Arkus launched, we realised it went further than that.

"Parents are using the fund for school savings, grandparents are teaching their grandkids and plenty of younger people are using it as their first serious step. The common thread isn't age. It's that they had been shut out of other funds."

Discover who you are as an investor

The appeal of investments with very low capital requirements goes beyond an opportunity to start growing a portfolio even when cash is tight. It can also make diversification a lot easier by spreading a little here and a little there.

Sure, micro-investing platforms that focus on shares can offer easy diversity across equity markets. But newer options such as Arkus make it easy to spread your money across entirely different asset classes.

This diversity helps to smooth returns and reduce the impact of volatility in any one market.

As Scully notes, the benefits of low initial capital requirements can go even further.

"Seeing your balance grow, even if much of the growth comes from your contributions, creates a sense of progress, making it easier to keep going," he says.

Scully adds that micro-investing apps or products can help newcomers "discover what sort of investor you are, how you behave when the market is up or down and build on these lessons for life".

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