Does small change investing make any big difference to your wealth?

Even though many Indians are waking up to investing, younger people strapped for cash feel they don’t have enough to start investing. This also applies to those who, at this point, have very little investible surplus. Small change investing/micro-investing apps are trying to change this notion by allowing investments as low as ₹1/10 into debt, US stocks, mutual fund schemes and digital gold avenues. This is done by rounding up your transactions and investing digital change every day by giving timely nudges. This small amount will add up over time and you wouldn’t even know the difference on a day-to-day basis.

While all this seem altruistic, there are two sides to every coin. Saving extremely small amounts in a narrow investment universe daily may not lead to big absolute wealth creation. The only benefit to be had is inculcating a saving habit in financially less aware or less disciplined individuals. However, the platforms have a ring-side view of your personal spending specs, which puts you at data leakage risk.

Modus operandi

Fintechs/apps such as Deciml (P2P lending), Jar (digital gold), Appreciate (US stocks) and Niyo (mutual funds) promote regular investments into the options available in respective platforms. These are financial intermediaries, ultimately feeding your savings into another product. They do not manage your savings. The common thread for all such platforms is the ‘save and invest with round-up’ feature. For instance, every purchase you make means an opportunity to invest your spare change! So coffee for ₹159 becomes ₹200 and ₹41 goes as investment in your future.

Every time you have a midnight craving and order food, the nudge allows you to round up the expense and save. The round-up is typically for online transactions, including spends made through debit/credit cards, UPI apps, digital wallets, net banking and ATM withdrawals. Globally, there are examples of platforms such as Peaks and Acorns that have pioneered the small change investing phenomenon.

To do this, either the platforms have access to your spending transactions as recorded through SMSes or messages on mobile, or via a neobank account. For every debit transaction (any payment, spending), the platforms make a note of the spare change that you may have saved. Depending on the fintech/app, you can either invest the spare change immediately or as soon as the accumulated spare change reaches/crosses) a certain limit. You can invest weekly or monthly basis also in some apps.

Costs, investing results

The financial returns of your micro investments depend on the avenue. Peer to peer lending (P2P) is a high-risk option since it involves lending to mostly non-prime creditworthy individuals. The marketed investment return potential for P2P is up to 10 per cent, and you should focus on ‘up to’ rather than the numericals. Deciml doesn’t charge any fee or withdrawal charge at the moment.

For US stocks, the rate of return can be higher depending on the stocks. Appreciate has zero account opening and subscription fees. Its website says fees by product are between 0.25 per cent and 0.75 per cent.

Gold has averaged 9 per cent CAGR for Indian investors for three and five-year periods and about 10 per cent CAGR for 10-year periods on a rolling returns basis. In case of Jar or any other app that channels your regular savings into digital gold, the gold price per gram can vary. Gold transactions involve 3 per cent GST on investment amount, while there may be insurance and locker fees. Buy-sell price difference can be 5-6 per cent including GST. Jar has no withdrawal or commission fees.

In case of spare change investing in mutual funds, NiyoX online savings accounts levies no commission. However, there may be some charges and taxes levied by MF companies and the government respectively.

Our take

Even though 20/30-year time period calculations on micro investments can show big figures based certain return rate, small change investing is not ideal for everybody.

One, it is only apt for those who can’t save or those who don’t have enough funds to start investing in conventional routes. Investing ₹5-10 per day will not move the needle much for your wealth. Yes, they can be a good starting point but do not expect anything beyond that.

Two, the investment avenues offered by various small change investing apps may not be suited to your goal/risk appetite. Instead of giving a gamut of options, typically platforms offer single product. US stocks, for instance, cannot fit everyone’s bill.

Three, the swathes of transaction/spending data with the fintechs/apps are also a worry. Though platforms say that data is protected with top-grade encryption, collected for regulatory authorities and will not be misused, data leaks and hacking are common these days. Without accessing such data, the platforms will not be able to nudge you to save. At the same time, sharing of the extremely personal nature of such data gives rise to concerns. Since most of the platforms don’t even charge any fees, the financial sustenance of such business models is also under cloud.

Also, when investments are tiny, the final accumulated sum will be meaningless even when the horizon is 20-30 years. In the context of inflation and investment as a means to reach our stated goal(s), random small sums deployed in various instruments aren’t likely to get us anywhere close to our targets.

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