P2P Lending vs Fixed Income Investments

Aug 17, 2022

In today’s modern world, investments have become a great source of revenue for individuals. There has always been a bitter competition between Peer-to-peer (P2P) lending and fixed investments. Which investment product is better, and which one is most beneficial for the investors? Is it the emerging markets of P2P lending or the traditional old ones – the fixed income investments? Both the assets have their perks; each has its advantages and disadvantages.

Peer-to-peer lending is also called social lending. It connects borrowers to investors without the involvement of an intermediary. Here, the traditional workings of banks are eliminated in the process. Since the P2P lending entities offer their services digitally which lowers operation costs they are able to stave off unnecessary transactional costs, thus allowing investors to earn higher returns on their investments.

People looking forward to sound returns should invest in Peer-to-peer lending, as it provides higher returns than the typical banks may offer.

On the other hand, fixed income investments provide a steady source of income with less risk than stocks. Government Securities, corporate bonds, debt mutual funds, and money market funds, are some examples of fixed income investments. People looking for steady and safe growth of their assets should invest in fixed income investments. But again, the limitation here is individuals investing in these instruments are limited to low single-digit returns which in turn may result in a negative real rate of return.

P2P Income vs Fixed Income

Are you still finding it challenging to decide what investment is best for you? Is it the high return peer-to-peer lending or steady, safe fixed-income investments?

Let’s dive deep into both these investment options. Here are some of the major advantages and disadvantages of both the investment types. Knowing them will help you to see which investment is better for you and which will give you the best result.

Advantages of Peer-to-peer (P2P) Lending

  • Provide high returns for investors

As an investor, the profits are lucrative in P2P lending. Your investments can go as high as up to ₹50,00,000/-. Since it is not market-linked, there’s zero volatility. Marketplaces such as LenDenClub have their advanced risk-mitigation strategies in place that reduce the overall credit risk. LenDenClub’s proprietary hyper-diversification principle automatically places your invested money across a large number of borrowers which reduces the risk of lending to as low as ₹1 per borrower. This enhances the potential of earning higher rates of returns that can go up to 12% p.a.

  • Ease of Access

P2P lending is meant for all. No matter your financial status, you can always invest in P2P lending. There is a very little entry barrier when it comes to peer-to-peer lending. As a result, your accessibility to this investment option is very high. If you are a budding investor, this is just the thing for you.

Capitalizing on the digital boom, LenDenClub allows easy access to its FMPP (Fixed-Maturity P2P) product in three simple steps! All you ought to do is

  1. Create your KYC Account digitally.
  2. Fund your account with the amount you want to invest
  3. Select the Time-Frame from a flexible period of 1-5 years
  4. Hit Invest!

That’s it, your FMPP is generated instantly after which, LenDenClub’s AI-based mechanism takes over to help you grow your money over time!

  • Principle of compounding

With LenDenClub’s FMPP, the factor of compounding is embedded into your investments. The principle of compounding can help you earn significantly more money than what you might have . But, time is key here. The higher the time-frame, the better are your returns. So, when you invest in LenDenClub’s FMPP, your money generates interest on your investments. This interest is added to your initial investment and reinvested. This cycle continues till maturity allowing you to grow your investment exponentially. So, the idea here is to invest for as high a time-frame as possible. In case you have future financial commitments with different time-periods, you can always create multiple FMPPs. This allows you to easily manage your goal-based investments.

  • Portfolio Diversification

As an investor, portfolio diversification is important. It helps to balance your overall portfolio. It’s the only tool that allows you to manage market risk and ensures better profitability. P2P investments can help you achieve this purpose. By choosing a product like this, you can successfully invest in a non-market-linked arena. Further, with LenDenClub FMPPs implementing their own set of diversification techniques, your risk is reduced further.

Disadvantages of peer-to-peer (P2P) lending

  • Restrictions and Credit Risks

All investment products come with a proportion of risk. P2P lending is a fairly safe option. However, the ability of the borrower to repay the loan amount in the fixed time interval can sometimes cause an issue. In cases of prepayment, the actual rates of returns may fluctuate at times. However, compared to market-linked investment options, P2P lending disadvantages are fewer. Trusted firms like LenDenClub take ample care to ensure good returns on investment via swift recoveries.

  • Platform Variation

As with any other investment, there are a lot of service providers all enabling you access to P2P lending investments with their own set of guidelines.  While on the face of it, P2P lending is a great investment tool, the behind the scenes due diligence vary with each platform. It’s always advisable for you to choose one of the leading platforms to ensure that your investments are handled by industry experts. But, individuals may fall for too good to be true promises that may have led them to take the wrong decision.

LenDenClub – one of the largest players in the industry – has till date disbursed close to 5,000 crore worth of cumulative loans since its inception in 2014. Further, it recently secured a $10 million in Series A funding paving the way to its goal of achieving 5x growth in the next few months. These stats are something that investors should look for, when considering a marketplace for investing in P2P.

     Advantages of fixed investments

  • Diversification of the investment from the stock market

Just like P2P lending, fixed investments also offer diversification. Fixed income assets are less vulnerable to volatility risks but still prone to interest rate risks. So whenever the interest rates in the economy decrease, the returns on FDs and other fixed income instruments mimic the reduction as a result! But still if you’re looking to protect your investments from volatility, fixed income instruments are always an option to do so.

  • Easy and Less Risky

Fixed investments are often considered to be a stepping stone for beginners in the investment arena. They are easy to navigate and require minimal intervention. Once the money is invested, you can sit back and relax. Further, fixed investments come with the option of flexible return periods. So, based on your choice, you can opt for quarterly, monthly, or annual returns. Since these are not related to market fluctuations, your investment is relatively less risky. But they still carry a default risk and the recent saga of various banks and NBFCs failing is the perfect example of that.

  • Good Option for Periodic Income Generation

Some fixed income investments have the potential to fetch you periodic cash flows. By taking on additional credit risk or interest rate risk, investors can also aim for high single digit returns. You can create a consistent stream of income with the aid of fixed-income investments. Bondholders receive periodic fixed income distributions in the form of coupons on their bond holdings. The income is generally tax-free in the case of municipal bonds.

Disadvantages of fixed income investments

  • Fluctuations in Interest and Inflation Rates

When the market’s interest rates rise the value of bond prices falls. These fluctuations in interest rate are a major cause of reducing the value of your bonds values in the market. Another variable that affects your bonds is inflation as the bonds provide us with a fixed amount of income at regular intervals. If the inflation rate outpaces the fixed income rate the investor loses the power to buy the bond

  • Lower or Negative Real Rates of Returns

Fixed income investments carry very low single digit rates of returns. With FDs, your returns may be limited between 4 – 7% p.a. whereas with bonds and other fixed income investments, the returns might vary up to 8 – 8.5% p.a. Considering the current economic scenario and high inflation rates it is unwise to invest in such low yield investment products for two reasons

  1. The real rate of return is close to zero or even negative when it comes to FDs. This in turn reduces your purchasing power capacity.
  2. There are much better options available in the market that can allow you to earn higher rates of returns over longer periods of time.

Recent developments in P2P lending

Peer-to-peer lending is one of the emerging markets which provides individuals with an investment opportunity to earn higher returns. Due to its transparency, high yields, and accessibility, peer-to-peer lending has become people’s choice when looking to grow their money at a fast pace and with considerably less risk.

There are many well-established marketplaces like LenDenClub that enable you to get maximum return from your investment. Lendenclub provides P2P services which help you to diversify your investment. Its FMPPs offer returns averaging 10-12% p.a.

Conclusion

If you want to earn money at a fast rate or want high returns at a little risk you should definitely go for peer-to-peer lending. Or, if you’re satisfied with low single-digit returns and virtually no risk then fixed income investments are the best bets for you.

You can even consult with market experts before investing or take help from emerging companies like LenDenClub to get maximum value from your investment. So if you’re thinking of P2P, you can join the bandwagon of a 2 million large investor community that is quickly growing. Click here to invest today!

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