Individual investors often wonder if they are making the right decisions with their portfolio. As new trends come and go, it can be hard to keep up and to determine how to best put their money to good use. Here we discuss crowdfunding platforms, which democratise finance and offer an exciting opportunity to investors.
What is Crowdfunding?
Crowdfunding is the idea of raising money from a large number of individuals. It is used by many different organizations and individuals. For example, crowdfunding is typically employed for philanthropic endeavors or to raise money for small businesses. Participating individuals are rewarded with anything from "thank you" emails, t-shirts, cash or ownership shares. Crowdfunding financing offers individuals the unusual opportunity to help finance an SME or startup.
Different Types of Crowdfunding Investing
SMEs that are not eligible for traditional business financing from banks and venture capital firms may choose to raise money through a crowdfunding platform. For as little as S$100, individual investors can contribute toward SME loans, in exchange for interest payments. Several platforms in Singapore offer these crowdfunded loans, which typically offer returns of 12 - 25% per year. These returns are relatively high, representing the relatively high risk associated with lending to companies that may have had difficulty applying for a bank loan.
Similarly, equity crowdfunding platforms allow individuals to invest in ownership shares of startups. This gives investors even higher risk and reward investment opportunities, which were previously only available to institutional investors such private equity or venture capital firms. Further, the minimum investment for these platforms is low enough to allow many investors access to these opportunities.
While this equity-based crowdfunding investments offer the potential for much higher returns (20 - 30% per year), they are also among the riskiest investments, as investors receive nothing if the business they invest in fails.
How Crowdfunding Compares to Traditional Investing
While crowdfunding offers great options for investors, there are other options that may be more appealing to investors, depending on their personal preferences. For example, there are several great brokerage firms for Singaporeans to invest in stocks and bonds of public companies. These companies are typically less risky than startups and SMEs, and therefore tend to offer slightly lower returns; typically, stocks have been known to return about 10% per year. An even more risk-averse investor might consider government bonds, which offer an even lower return of 2-4%, and are supposed to be guaranteed.
Additionally, individuals that do not have investing expertise might prefer to have professional investors manage their money. These individuals may be better suited with robo advisors or traditional wealth management advisors. These services make decisions on behalf of the individual, which can help those individuals that are not adept investors themselves.
How Modern Crowdfunding Platform Innovations Are Combining High Returns with Low Risks
Typically, crowdfunding platforms give individual investors new opportunities to diversify their portfolio. These opportunities in new and exciting companies typically offer higher risk / reward profiles than traditional investments, such as stocks or government bonds, and require more research than actively managed accounts.
Therefore, individuals that are willing to add slightly riskier investments to their portfolio and have the time and knowledge to research startups and SMEs should consider investing with crowdfunding platforms. Individuals that are risk averse or not able to conduct their own analysis, may be better off with traditional investment mechanisms.
Some crowdfunding platforms, however, offer the best of both worlds. Platforms like Funding Societies and MoolahSense have very low minimum investment requirements (S$100), which allow investors to invest in several different loan campaigns. This diversification allows investors to spread their risk across many SMEs, making the process slightly less risky. For example, both platforms have been known to result in default rates of just 1.3 to 3.5%. Additionally, these platforms provide auto-invest features, which allow investors to automatically reinvest their earnings based on several customizable preferences, thereby reducing the research burden that would otherwise be required to maintain a productive portfolio.
This was first published at Value Penguin's website, "Crowdfunding: A Great Alternative to Traditional Investing?".