Peer-to-Peer lending: The rise of the alternative investment class

The 2008 financial crisis unleashed chaos as it severely impacted the financial markets, with investors taking a big hit on their equity portfolio and being jolted out of their comfort zones. The COVID-19 pandemic, which resulted in an unprecedented health and financial crisis, was yet another economic catastrophe of a similar proportion. Besides paving way for several financial reforms, these events reshaped the country's financial landscape, with investors cherishing significant takeaways for life.

Investors have been on the prowl to discover assets that offer non-volatile investment with minimal correlation to the equity markets, such that investments are insulated against market shocks. This dilemma has paved the way for the rise of alternative investment classes, whereby investors can now avail exposure to new-age, tech backed investment avenues.

Most of these investment offerings are operated on an end-to-end digital platform. They are an investor’s haven as they help them explore new means for booking profits and portfolio diversification while enjoying a passive source of income. One such new-age offering is P2P lending which has gained immense popularity in India in the last few years. The platform allows individuals to participate in retail or SME lending through short-term loans of not more than a year. As these loans are not linked to the public markets, they aid in insulation as investors can avoid unprecedented market fluctuations while still earning market-beating returns.

An alternate investment avenue P2P lending connects lenders directly with borrowers through their marketplace, thereby eliminating the role of a middleman. It offers seamless borrowing and lending irrespective of the location. An individual investor or a financial institution can become a lender on P2P lending and earn an interest of anywhere from 10% to 12% each year qualifying as a great investment option.

Portfolio diversification for insulation against risks
Defaults are one of the biggest risks when it comes to unsecured lending. However, P2P lending factors in this risk by mapping a particular investment to several borrowers. In other words, the tech platform employs Artificial Intelligence (AI) and Machine Learning (ML) technology to map a particular investment against 100 loans as a default risk mitigation measure. Now even if there is a possibility of 5 borrowers going bad, considering a weighted average returns of 25.50%, one will lose approximately 5% of returns while still making a handsome return of more than 20%. Optimal diversification can aid in improving the performance of one’s investment whilst ensuring high returns.