In the past, saving was considered the best way to enjoy greater security in your personal and professional life. Yet, due to inflation, savings held in cash will gradually lose their value over time, with the average rate on a modern-day savings account being around 0.13%.
As a result, money-conscious individuals have sought other ways to reap these benefits, one of the most popular being investing. As the cost of living rises, deciding to invest is a sound way to protect the value of your money, build wealth, and reach your long-term financial goals. But what should you invest your money in? That’s the question.
Cryptocurrency, stock markets, mutual funds, bonds, and precious metals, are just some of the hundreds of ways to spend your investment money. While there is no correct answer, one thing can make a difference to your investment portfolio: start-ups.
Despite carrying great risks, investing in start-ups can leverage a significant amount of power across your investment portfolio, from diversifying your portfolio, giving you a range of options, and allowing you to reap (potential) early-bird rewards – start-ups hold much power. We go into more detail about the impact they can make below.
Diversifies Your Investment Portfolio
When you diversify your investment portfolio, you don’t just choose one asset type to focus on; you choose multiple. Diversity can mitigate volatility in your investment portfolio and protect you against risks so that one asset or asset class doesn’t drag down your entire portfolio. Ultimately, it aims to reduce losses by spreading your investments over different areas, which all react differently to the same event.
Typically, there are two ways investors can diversify their portfolios, either across asset classes or within them. This means that you’ll spread your investments across multiple asset types or within their class; for instance, instead of investing solely in cryptocurrency, you could choose EIS Investment Opportunities, bonds, real estate, and much more. That way, you don’t place all your eggs in one basket and spread your investments across various asset classes for safety.
A Range Of Options
Another power that start-up investment can have on an investor's portfolio is the range of options available. Using an EIS or SEIS Scheme, you can invest in start-ups during their early stages with a trading history of two to seven years and add various enterprises to your portfolio, from lifestyle to small business, scalable, buyable, social, and large company start-ups.
Those considering start-up investing are usually advised to add five to ten enterprises to their portfolio, which can help create a healthy, diverse investment portfolio, including start-ups in different sectors, led by various entrepreneurs, and at different stages of development.
Suppose that there's a specific start-up sector that you’d like to invest in, like early-stage technology companies. In that case, you could consider using alternative investment managers like Oxford Capital, which specialise in giving dedicated investors access to some of the most impactful technology companies in the UK.
The Potential To Benefit From Early-Bird Rewards
One of the most significant benefits of investing in start-ups is that they give investors the potential to benefit from early-bird rewards. Although many risks are associated with start-up investments, the rewards you could reap are even more significant if it pays off.
Since 20% of businesses fail within their first year, the risk of losing your entire investment is a real possibility, yet if it does survive past its first year, you could benefit from very high returns. However, they are attractive because the entryway price is lower during the early stages, though there is always the risk of it not performing as well, which opens the potential for losses.
Due to this, most investors are advised to add five or ten enterprises to their portfolio, as it's more likely that two or three will perform well. However, investors can mitigate some risks associated with start-up investments by investing in venture capital funds like SEIS and EIS Schemes. Still, it doesn’t change the likeliness of the business failing within the first year.
Tax Relief For Investors In The UK
Another power that start-ups have on an investment portfolio is that they give UK-based investors a chance to minimise the risks and generate more returns. Should you have shares within a start-up for at least three years, tax wrappers like SEIS and EIS Schemes can provide up to 30% tax relief to UK-based investors, reducing the risks of investing in start-ups significantly.
In contrast, SEIS Schemes can offer up to 50% tax relief (so long as you’ve had shares within the company for upwards of three years) since these schemes offer investment opportunities during the very early stages of a start-up, like the idea stage. Not to mention, any gains are free from Capital Gains Tax which can reap greater rewards for investors.