2018 was not a great year for equity investors.
2018 was not a great year for equity investors. The Sensex gave around 8 percent returns in the last one year, while the Nifty generated around 5 percent in the year gone by. Fans of fixed deposits didn’t have a great year either. Interest rates on deposits of 1-2 years below Rs 1 crore ranged from 6.70 percent to 7.30 percent, still unattractive to high tax bracket investors. Want to consider an investment option that has the potential to offer double–digit returns in a year?
Ever heard of P2P lending? Well, Peer-to-peer (P2P) lending is an online marketplace regulated by the Reserve Bank of India (RBI) and works on the crowd-funding concept. Individuals looking for unsecured loans meet people willing to lend money at interest rates agreed by both the parties.
The interest rate majorly depends on the borrower’s profile and risk grade. Since the terms and conditions are laid out beforehand in the loan agreement, the investor knows his expected return and the tenure for which he is investing.
“P2P is a cash-flow investment where you get monthly returns along with the satisfaction of helping people (in need of money) and the nation,” says Vinay Mathews, Founder & COO, Faircent.
But focusing solely on return while making an investment is not a great strategy. One must diversify investments among various asset classes to taste its long term benefits.
“One should look at all instruments. P2P is the only debt product with risk-adjusted returns of 16-18 percent. I advise investors to start small but create a portfolio,” adds Mathews.
“If this instrument is added to your investment portfolio, it increases your portfolio return. If you diversify 15-20 percent of your investment in P2P lending, your overall returns can go up by 1.5 to 2 percent,” said Bhavin Patel, CEO and Co-Founder, LenDenClub during an ET Webinar on P2P investments.
According to Patel, a portfolio comprised of equity, fixed deposits and mutual funds gives an average return of 15 percent. P2P lending can add more value to a well-diversified investment portfolio.
“Also, there is no volatility in P2P lending unlike equity thereby protecting the principal amount. However, returns can be deteriorated due to default by the borrower, which can be mitigated through micro diversification,” adds Patel.
“For instance, if someone wants to invest Rs 5 lakh in P2P lending. The amount can be divided among 1,000-1,500 different borrowers. In this case, the principal amount would be protected despite a 4-5% default,” explained Patel during the Webinar.
“Higher granularity leads to reduced dependency on specific assets, which in turn means reduced risk for investors. An investment that is split across five loans with an average ROI of 15.5% p.a. is less risky than an investment in one loan with an ROI of 18%,” says Abhinandan Sangam, Co-founder & CTO, Finzy.Some experts say ROI alone is not a good indicator of risk. Thus, it is important that each investment is diversified across multiple loans.
Mathews of Faircent also advises lenders to invest across different products like a business loan, student loan, a line of credit under the umbrella of unsecured personal loans on the P2P platform.
Some platforms like Finzy offer auto-invest option to lenders that provide investors with multiple options pertaining to reinvesting their returns.
“Lenders can re-invest their EMI’s principal component, EMI’s interest component, prepayments or any combination of the three. With this, not just the returns get reinvested into smaller loans but also into new borrowers and also provides investors with power of compounding returns,” adds Sangam of Finzy.
However, P2P needs to be seen as a growing independent asset class since there are no benchmarks to analyse its growth. The industry is at its initial stage and has just begun spreading its wings in the fintech space.
Credit: Economic Times