Here’s Why Peer to Peer Lending Should be Part of Your Investment Portfolio14 June, 2018
In general, most investors are attached to a particular investment or asset class. It might be gold, fixed deposits, or stocks, to everybody his own. However, keeping all your eggs in one basket is often a risky proposition. In case, the asset you have singularly invested in starts giving poor returns, all your efforts at wealth creation become futile.
That’s why portfolio diversification is an important first step for every investor. Portfolio diversification helps you offset the volatility and balance out returns over a period of time. Portfolio diversification ensures that returns do not always mirror market fluctuation and are able to hold steady even in low interest rate environments and bear markets.
Diversifying an Investment Portfolio through Asset Allocation
By spreading your savings across a range of asset classes which are not correlated to each other, namely stocks, fixed income, real-estate, gold, etc. you can minimize the risk factors significantly. For example, if the equity market is showing heavy fluctuation then your gains from fixed income investments, can help offset that imbalance.
Asset allocation mainly depends on an investor’s appetite for risk. For example, equities are considered a high-risk, high-return investment. But again, holding one type of equities can raise the risk-factor manifold, so you should try to diversify within an asset class as well.
Investing in Peer-to-Peer Lending
Peer to Peer lending (“P2P lending”) by matching investors (aka lenders) with potential borrowers, throws open the personal loan asset class, which has traditionally been accessible only to banks, to individual investors who are willing to lend for better returns. P2P platforms take care of borrower sourcing, screening and grading which ensures that investors are able to make educated lending decisions in line with their appetite for risk and return expectation.
Peer-to-peer lending is emerging as a lucrative investment option for Indian investors looking for a short term, fixed income investment that has the ability to generate comparable or better returns than equity.
In India, Peer-to-Peer lending as a concept has seen a relatively late arrival. Western economies are already past the P2P boom whereas China is currently the largest P2P lending market in the world. India, with its 1.3 billion plus population and tag of world’s fastest growing major economy, has a considerable appetite for both credit and wealth creation. P2P lending can become one of the key drivers of the Indian growth story, giving domestic investors a unique opportunity for passive income generation while simultaneously funding the ‘Indian dream’ by expanding financial access to creditworthy borrowers who are under serviced by banks.
Here are the reasons why Peer to Peer lending should be a part of your investment portfolio.
Simplicity and full control:
The fundamental difference in Peer to Peer lending is that it values an investor’s risk appetite and gives him full choice to invest in loans that mirror his preferences. This is quite different from say Mutual funds, where portfolio performance ultimately comes down to the acumen and dexterity of an individual fund manager. In P2P lending, right from choice of return to the period of lending, the lender gets full autonomy in deciding the structure of his lending portfolio.
In addition, unlike equity investments, which come with a certain amount of complexity and volatility, P2P investments are fairly simple to operate with requiring only periodic portfolio management checks as the P2P platform takes care of all other nitty gritty right from repayment collection to borrower sourcing.
Higher Risk adjusted Yields:
The obvious reason P2P lending is gaining popularity is because of its ability to offer higher risk adjusted returns. A P2P lender can earn upwards of 15% per annum on investment which is at least two times higher than comparable fixed income investment opportunities available today. When you compare the interest rate for a fixed deposit (6%) with the average interest rate on a P2P loan (16% or more), the picture becomes clearer.
If you have been investing heavily in bank fixed deposits, switching part of your portfolio to P2P lending can double your return potential.
Now, one might argue that higher returns means higher risks. Well, that is not necessarily the case with Peer to Peer lending. P2P lending is not like investing in equities, where your investment flourishes or diminishes as per market trends. The risk however is that loan default can occur.P2P platforms like Monexo have built a robust risk mitigation infrastructure focused on ensuring that default risk for lenders is minimal. Loans are offered only to vetted, verified salaried borrowers who are subjected to rigorous credit risk assessment using 150+ traditional and nontraditional data points. And what’s more – repayment performance is reported into credit bureaus like CIBIL which ensures borrowers who do not make timely repayments are severely penalized through a credit score downgrade which will adversely impact future ability to borrow.
Borrowers who delay payments are also pursued through approved collection and recovery practices which can start with field visits and go all the way to full-fledged legal action if payment is not received post follow-ups.
Now despite the robust screening and repayment collection process, there is still a possibility that a borrower may not be able to repay dues on time. Hence the bedrock of risk mitigation in P2P lending comes down to the building a diversified loan portfolio. By investing in small amounts across multiple loans, lenders are able to ensure that their capital is not locked up majorly in any specific loan. Such large-scale diversification of lending ensures that even with a few NPAs, the lender’s portfolio continues to generate rewarding returns.
Regular, monthly Earnings:
Peer-to-Peer lending stands out as a differentiated offering for investors as it provides for a steady stream of monthly income. As the amount lent through the P2P platform gets repaid in the form of monthly EMIs (principal + interest), the lender can use this monthly cashflow to further reinvest and compound earnings or withdraw it to the investor’s bank account periodically. As a simple illustration, a Rs. 10 lakh investment that is lent through a P2P platform for a period of say 36 months at an interest rate of 18% p.a. can generate a monthly cashflow of nearly Rs. 30,000 for the investor. Isn’t that awesome?
Shorter investment Horizon with Increased Liquidity
Peer to Peer lending does not require your capital to be locked up for years together to be able to generate high yield. Since loans typically come with a tenor of 6 – 36 months with monthly repayment, P2P lending is a rare investment where the lender’s money begins to come back from the very first month of investment. Again, by diversifying your P2P lending portfolio, you can spread your investment in a flexible manner, ensuring that your money is never sitting idle but is still there when you need it.
Wondering how you can invest in Peer to Peer lending loans?
All you need to do to become a lender is open a lender account with a P2P platform. There are quite a few P2P platforms out there so make sure to choose yours diligently. Some key metrics you should look at closely before deciding on the choice of platform is the platform’s promoter team, borrower credit assessment process, Escrow account availability and track record of returns.
Monexo is one of India’s leading and fastest growing Peer-to-Peer lending platforms trusted by 2000+ registered investors and 300+ financial advisors. You can sign up as a lender on the Monexo platform in just a few simple steps. Visit www.monexo.co to add Peer to Peer lending to your investment portfolio today!