Diversified investment portfolio

Ficus Capital executive director Abdullah Hidayat

A way to balance risks and rewards is not to put all your ‘‘eggs into one basket.’’

Diversify your investment portfolio to accumulate wealth.

This is essentially important in current challenging times, given that the convergence of inflation and recession is making it tougher for investors to invest for quick gains.

Besides the traditional investment instruments to accumulate wealth such as stocks/shares, bonds, unit trust, fixed deposit and real estate, equity crowdfunding (ECF) is an option for retail investors.

ECF normally invests in unlisted companies that are shielded by day-to-day stock price fluctuations and in current times where markets are volatile, a report said.

ECF has long been an option for startups and small businesses to source funding from the public.

A word of caution from experts in the ECF industry is to only invest in online platforms registered with the Securities Commission (SC). There are 10 of such platforms in Malaysia.

There is no denying that many early investors into growth companies have been rewarded handsomely.

“Our advice to all investors is to spread out their investment and have a diversified portfolio. As part of their diversification, consider putting funds into a few issuers rather than just one,’’ Pitch Platforms Sdn Bhd (pitchIN) co-founder Sam Shafie said.

He added that the “potential returns for fast-growing ECF issuers are typically from two times onwards, and the most successful ones will generate far more than two times.’’

Ficus Capital executive director Abdullah Hidayat said the return from ECF investment usually comes in two ways.

It is either price gain – whereby the investors manage to sell their investment at a higher price than the purchase price – or/and in the form of dividends.

When investing into ECF, be prepared to wait for returns. Take a long-term view.

“Successful ECF investments typically generate very high returns. Patient investors who invest in the right ECF issuers stand to gain handsomely.

“Some investments will take three to five years and others a bit longer to realise the returns on their investment,’’ Sam said.

As to how much you can invest in a startup or small business depends on the companies that are sourcing for funding. It is up to them to decide the minimum investment that they will allow investors to invest into their companies.

Sam said the SC’s recommendation is that investors invest the maximum based on their category i.e. retail investors – up to RM5,000 per company and RM50,000 per year.

For angel investors, it should not be more than RM500,000 and there is no limit for sophisticated investors.

Abdullah believes investors that invest via crowdfunding (CF) usually have no control and no influence on the valuations of the company they are investing in.

“Usually, the company founders overate themselves and place high valuations. This happens because the company founder would like to get as much money into the company by selling as little share or equity as possible,’’ Abdullah said.

While there are many success stories of startups and small businesses turning into big business and even unicorns, there are equally many unsuccessful stories.

Thus far, more than RM500mil has been raised by the ECF issuers for companies in the country. Globally, it runs to billions of dollars.

Abdullah said given the risks that comes with investing in a CF platform, investors need to do an in-depth analysis of the underlying companies.

He believes the risk in investing via CF is equal to investing directly into private companies.

“The CF platforms just make the investment in the private companies easier for retail investors.

“They do not in any way reduce the risk of investments in the private companies,’’ Abdullah added.

Sam said they conduct due diligence and compliance on all companies that are fundraising on their respective platforms.

“This covers not only the people behind the company but also the business proposition of the company. pitchIN is also responsible to do eKYCs (electronic know your customers) on investors,’’ Sam added.

After raising funds on ECF platforms, the startups or small businesses are required to report their progress regularly and share their audited accounts with the investors.

The onus is on the investors and shareholders to keep track and ensure the funds raised are used for what they were intended for.

Even charities can raise money via donation-based CF but not ECF. When you donate don’t expect any returns.

Abdullah said investing into CF is akin to investing in any private company directly. Therefore, the risk of investment is always higher than stocks, bonds, unit trusts and fixed deposits.

“However, just like any other investment, the more risks one takes, the higher the returns can be.

“This is true for CF investment as well, whereby the investors can get a return in the form of price gain, dividend and sometimes even a discount on company products or services,’’ Abdullah adds.

Whatever may be your goals towards accumulating wealth, best to read the fine lines of any contract and do your research before parting with your money.