Here's why smart Investors in India should opt for P2P lending
To enhance their income portfolio, smart investors must consider entering the realm of P2P lending, seek relevant information and build diversified portfolios accordingly. The basic idea is to have a clever risk-to-reward strategy while starting small but thinking big...
By Rajat Gandhi
Stock prices will be bullish one day, bearish the other. Bonds are likely to fluctuate without giving a cue. SIPs and mutual funds come with extended lock-in periods. Bank interest rates, especially for the short-term period, have little to offer in terms of meaningful gains. With this information, what does a discerning smart investor trying to make the most out of his money do? Opt for the new lucrative investment option of peer-to-peer (P2P) lending.
Smart investors build a diversified portfolio
Peer-to-peer loans are the perfect alternative investment instrument for income-seeking investors. It enables you to offer personal loans to borrowers for an array of purposes while eliminating intermediaries such as banks, NBFCs, and unorganised lenders.
A completely technology-driven, state-of-the-art credit-evaluation mechanism can assign pre-ascertained interest rates to borrowers after evaluating them across several parameters. Loan requests can be categorized into various buckets like low, medium, and high risk and any lender can fulfil a borrower’s requirements at these interest rates. one of the smartest way to mitigate risk for a smart investor is to build a diversified portfolio by investing small amounts in a large number of borrowers across all risk buckets.
Furthermore, a good P2P lending platform can make available all the relevant information on borrowers to lenders, assisting them in assessing the credit profile of a borrower in an efficient manner. It can provide each lender with a customized dashboard with relevant informatics and data to help make an informed decision.
Smart investors use all information available to them to analyse the risk – to – reward ratio of their investments. It can also provide a What-if portfolio analysis which can help lenders simulate the performance of various loans in their loan portfolio to understand the returns they can make in multiple risk scenario.Smart Investors compare P2P lending with other market-linked investments
- On a month-to-month basis, investors can receive a part of their principal amount, along with the monthly interest, which can be reinvested by them to further augment their earnings. The reinvestment of returns allows them to counter inflation with compounding returns.
- As per our research, lenders on our platform can earn gross returns to the tune of 18 to 24 percent p.a on an average by building a diversified borrower portfolio. These returns are not merely comparable, but often preferable to returns from other investment instruments such as mutual funds, stocks, real estate, bank deposits, and gold. Income-seeking investors who specifically want to diversify their investments get good returns at the end of the day. As a rule of thumb, at least 20 percent of total investments should be in alternative investments like art, commodity, P2P lending etc.
- By managing and controlling risks, P2P lending extends unsecured loans to creditworthy borrowers. Yet, it is prudent for lenders to calculate their yields while factoring in a delinquency ratio of 2-3 percent. By planning the returns, they expect from the investment, lenders can work backwards and manage their portfolio accordingly. New product offerings like personal loans to students and auto loans to Baxi drivers help Lenders build diversified portfolio.
Smart Investors partner with a platform that understands and mitigate risk
Cutting-edge lending, borrowing, and underwriting mechanisms – These aspects serve to give a structure to any P2P lending portal. For example, our platform comes with automated processes such as an investment limiting mechanism which strictly keeps the lending amount to a maximum of 20 percent of the borrower’s requirement. This again is supported with a proprietary underwriting mechanism and legally-binding agreements as well as PDCs, which effectively manages and mitigates defaulter risks.
To cut a long story short, in order to further enhance their income portfolio, smart investors must consider entering the realm of P2P lending, seek relevant information and build diversified portfolios accordingly. The basic idea is to have a clever risk-to-reward strategy while starting small but thinking big – because at the end of the day, every cent and % counts!(The author is CEO & Founder of P2P lending platform Faircent.com. Article edited for Moneycontrol. Author's views are personal.)