Crowdfunding: A great alternative to traditional investing

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 with and determine how best to put their money to good use.

The following article deals with crowdfunding platforms, which democratises finance and offers an exciting opportunity to investors.

What is crowdfunding?

Crowdfunding is the idea of raising money from a large group of people. It is used by many different organisations and individuals.

For example, crowdfunding is typically employed for philanthropic endeavours 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.

Types of crowdfunding investing

SMEs 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 RM300, individual investors can contribute toward SME loans, in exchange for interest payments.

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 as 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 investment offers 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 with traditional investing

While crowdfunding offers great options for investors, there are other options that may be more appealing, depending on personal preferences.

For example, there are several great brokerage firms 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 that 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, 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, who are not adept investors themselves.

How modern crowdfunding platform innovations combine 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 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.

Those who 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 (RM300), which allow for investments 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 customisable preferences, thereby reducing the research burden that would otherwise be required to maintain a productive portfolio.

This article first appeared in thenewsavvy.com

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