Should Mutual Fund investors change their strategy and add P2P Lending to portfolio after budget 2019?

20 February, 2019


Ahead of the general elections, the interim budget of 2019 came out with some goodies for the farmers and the middle class. Some more money in the hands of the common man and woman is expected to boost consumption. However, the mutual fund investors have not received anything special from budget. Belying expectations from some quarters, mutual funds have not got any extra tax benefit.

On the contrary, the re-introduction of stamp duty on financial transactions is going to make mutual funds expensive. Plus, the ongoing problems in debt mutual funds investment is making investors realize the underlying risks. This is why it can be argued that the time is right for MF investors to tweak their investing strategy and warm up to a smart investment avenue - P2P lending

No special tax benefits for mutual funds in budget

Most retail and HNI investors use the Section 80C of Income Tax Act to save taxes. Tax-saving mutual funds, also called ELSS, allow you to invest in them and the amount of investment is deducted from your gross income. The limit for this Rs 1.5 lakh. Such mutual funds are not the only eligible investment product in Section 80C.

Investments in life insurance premium employees’ provident fund (EPF), public provident fund (PPF) and a raft of others are also competing for this Rs 1.5 lakh tax-saving window. With the interim 2019 budget not giving any extra space for mutual fund investment, there is no tax benefit in boosting your MF exposure.

The government has announced a full income tax rebate for those with taxable income of Rs 5 lakh. This means anybody with a taxable income of Rs 5 lakh would earlier pay 5% income tax or Rs 12,500. This Rs 12,500 need not be paid anymore. However, for those with higher taxable income than Rs 5 lakh, they will not get this benefit. So, investing more in any tax-saving avenue makes no financial sense.

It can be argued that those looking for a smart investment should seriously consider P2P lending for getting better than inflation returns if they can take risk. Do keep in mind mutual funds don’t guarantee any returns, and you are taking market risk in them too.

Look at the table to understand more the income tax situation changes for somebody drawing Rs 9 lakh annual salary.
Particulars After Interim Budget 2019 Before Interim Budget 2019
Salary Rs 9 lakh Rs 9 lakh
Deductions
Interest on housing loan Rs 2 lakh Rs 2 lakh
Standard deduction Rs 50,000 * Rs 40,000 *
Section 80C deductions Rs 1.5 lakh Rs 1.5 lakh
Net taxable income (after all deductions) Rs 5 lakh Rs 5.1 lakh
Tax Rs 0# Rs 15080

* Standard deduction hiked in budget to Rs 50,000 from Rs 40,000
# Full income tax rebate for income up to Rs 5 lakh


Watch this video to know why Ramanathan Krishnamoorthy, who has over two decades of professional experience working for mutual funds at top levels, is now betting big on P2P investments through Monexo.

P2P lending giving better returns than mutual funds

If you are okay with taking more risk in mutual funds, consider P2P lending to get 15% plus annual returns. Retail investors are betting on stocks which are more volatile due to external market conditions than Mutual Fund. Retail investors also need a lot of knowledge, analysis, etc to bet correctly, whereas in p2p lending it is very simple. A platform like Monexo is just connecting individuals with display of the profile like repayment capability, track record etc. So, p2p lending is nothing but investing in loans which promise the highest yield.

Historical data shows that p2p lending returns are giving better returns than mutual funds. For instance, p2p lenders on Monexo earn 15% plus per annum.

Additional read: The real truth about investing in fixed deposits and why you should invest in P2P

Let us compare these returns with mutual funds.

As many as 16 equity mutual fund categories have posted losses in last one-year year, with infrastructure mutual funds, PSU mutual funds and small-cap mutual funds losing 20% in last one year time period. Take a look below at how key mutual fund categories have done in last one year.

Category 1-Year Return (%)
Equity: Large Cap -0.43
Equity: Large & Mid Cap -9.74
Equity: Multi Cap -6.78
Equity: Mid Cap -13.66
Equity: Small Cap -22.48


As you can see, P2P lending returns of 15% compare very favorably when seen in comparison with category returns of mutual funds. How about the best funds in each category? The best largecap fund has fallen by 6% in one year. The best large and mid-cap fund has declined by 1.5% in last 1 year. The best multicap fund has given 9.8% return, paling in front of 15% return of peer to peer lending. The best mid-cap fund has generated just 5% return in last twelve months while the best smallcap fund has lost 7%.

Even debt mutual funds pale in comparison to peer to peer lending returns. If you take the lowest return of 13% per year for p2p investing, there is no single debt mutual fund category that comes close. Fixed maturity plan mutual funds and Gilt mutual funds have given best category averages of 7-8%, but they are close to half than the 13% minimum return from p2p lending. In the interim budget 2019, government has proposed levying stamp duty on financial securities transactions, which includes financial instruments like mutual funds. Since mutual funds deal with shares, investors investing in them will have to bear this tax. This will make investing a tad costlier. Fortunately, peer to peer lending is not going to be affected by any such stamp duty. This gives you another reason to consider P2P lending

Debt mutual funds struggle with corporate exposure

In fact, debt mutual funds, which have been long marketed as bank fixed deposit alternative, are reeling from bad corporate exposures. There are as many as 5 debt mutual funds who are showing negative returns in the one-year period ended February 15, 2019.

Fund 1-Year Return (%) 1-Year Rank Net Assets (Cr)
Motilal Oswal Ultra Short Term Fund - Regular Plan -7.89 17/17 216
Invesco India Credit Risk Fund - Regular Plan -2.97 18/1 303
DSP Credit Risk Fund -2.15 17/18 4,689
Principal Cash Management Fun -1.8 36/36 378
Tata Corporate Bond Fund - Regular Plan -0.95 17/17 272


Wait a second - How can investors in debt mutual funds experience losses? The answer lies in bad investments.

Debt mutual fund schemes give loans to corporate. As long as the principal and interest is repaid, things are okay. But, as we have seen in the case of IL&FS, DHFL and Essel group crisis, even the biggest of corporates can go through periods of liquidity crunch.

As per rules, when a mutual fund investment stops generating income or when the credit rating of the corporate is lowered due to financial problem, mutual fund managers reduce the value of the investment. The value can be lowered to even zero. Who suffers when the investment value in a particular debt security drops to zero? The Investor suffers and experiences a loss. This is exactly what has happened now to debt mutual funds.

In a mutual fund, an investment in a company can get hit due to events like political conditions, market conditions, company internal conditions like restructuring of the management. This may lead to larger losses and it may take a lot of time to recover, say at least 6-12 months.

In case of P2P, individuals’ loss can happen due to events like job loss, illness, etc. But as p2p is via online platforms, a majority of the customers will be of young age and the possibility of the above events happening will be minimal.

In comparison, peer to peer lending is all about investing retail-level loans. Unlike mutual funds investment which invest in loans of companies, p2p investment is mostly about backing common man borrowers. Though there are a few exception, on the whole retail borrowers are extremely cautious, and try to repay loans with interest on time. No retail borrower likes to default even on the smallest of loans.

Additional read: What If A Borrower Defaults On Your P2P Loans?

Also, do remember p2p loans are not given to everybody. This automatically shields yourn investments from risks of high default. Platforms like Monexo allow loans to be given only when borrowers meet certain criteria such those having regular identifiable income from salary, profession or business.

Also, credit scoring models helps lenders avoid borrowers who have a history of bad credit behaviour. The model is not built on hearsay or manual inputs. Monexo has also partnered with CRIF Highmark Bureau in India and built this proprietary model based on decades of payment behaviour by millions of Indian consumers to financial institutions in the past.

Conclusion:

Smart investors looking for high return on investment must consider alternate avenues if they want to get good returns. If you don’t get serious about investing, you will never make serious money. It is time to take measured risks to generate optimal returns that will help you grow your wealth. Mutual funds may be be a part of your portfolio, but with the problems and lack of incentives explained above, you need to give your investment portfolio the edge provided by peer to peer lending. P2P investments give you monthly repayments of principal and interest and and you can reinvest your monthly repayments from borrowers too. Earn upwards of 15% risk-adjusted returns per annum.

So, what are you waiting for?

Invest with Monexo P2P lending. Apply to be a P2P investor today