Risk Mitigation vs Systematic Risk Mitigation

Aug 16, 2022

Risk Mitigation vs Systematic Risk Mitigation

Knowing what risk is can help someone work a way around or out of it. After all, investments are meant to fetch you high returns. Besides, being worry-free can be an added value to risk-free investments.

In this blog, we shall take a look at what risk mitigation and systematic risk mitigation are. We shall take a look at how FMPP uniquely deploys the latter in offering its investment proposition. 

We shall begin understanding the types of risk any investment avenue is prone to and then know why FMPP gives you returns that are highly risk-mitigated and worry-free.

Understanding risks in investments

Risk is a ubiquitous concern when it comes to investments. Investment avenues, depending on their mechanism, lie on a vast continuum of low to high risks. Mediator-pooled investment avenues like fixed deposits, recurring deposits, and post office investment are the least risk-prone investments. Market-linked investment avenues like primary and secondary assets, mutual funds, etc are the riskiest, albeit in varying degrees. 

Several factors define the level of risk an asset class is prone to. The mechanism an asset class works on is the most important of all. Market-linked asset classes are directly affected by the ups and downs of a market. Primary and secondary market assets virtually have no protection against the whims of the market. Mutual funds investments and SIPs are pooled across various securities; thus, the returns are not subject to the performance of any one type of security, unlike in primary and secondary market investments. Hence, even though mutual funds and SIP investments are market-linked, there is an added dimension of protection. Nevertheless, they all are prone to market risks.

Mediator-pooled investment avenues like Fixed Deposits, Recurring Deposits, and postal saving schemes, on the other hand, are debt-based; the money pooled from investors is lent to creditworthy borrowers. The repayments from borrowers with added interest rates are paid back to investors by the mediators, namely banks and the post office, by charging some commission. Such investment avenues have principal protection, an added dimension of protection. Although Banks have unlimited liabilities, the repayments of the principal to investors are subject to the amount a mediator can liquify. 

P2P investment works on the same principle as a mediator-pooled one does. However, instead of a mediator, the investments are facilitated by an aggregator, namely a P2P platform. A P2P lending platform like LenDenClub follows all the protocols like a mediator. Therefore, only Credit Bureau-verified borrowers are on-boarded. LenDenClub also has another checkpoint in place; would-be borrowers are screened over 200+ verification points for further establishing their creditworthiness. This way, LenDenClub has ensured consistently low NPA for the past five years. A P2P platform charges a small facilitation fee instead of a commission, and P2P investors earn fairly due to the disintermediated nature of the mechanism. 

Risk-related challenges with other P2P plans

P2P investment is non-market-linked, thus not subject to market risks. Hence, P2P investments are r than market-linked asset classes. However, just like mediator-pooled investment avenues, returns with P2P investments are subject to repayments from individual borrowers. Hence, any instance of EMI non-payment can lead to NPA. 

As per an RBI mandate, one cannot invest more than ₹50,000 in one borrower because non-repayment of a large sum can lead to a massive NPA. 

LenDenClub’s new offering, FMPP, i.e. the Fixed-Maturity Peer-to-Peer Plan, has been devised to work on the principle of hyper-diversification. The allocation of funds to individual borrowers is as low as ₹1. This way, the NPA is evened out on a platform level–a phenomenon called Systematic Risk Mitigation, giving Marginalised NPA. FMPP has been devised to give Marginalised NPA and returns of up to 10 to 12% p.a.*

FMPP, therefore, an evolution in the new-age investment avenue, is set to give platform-level uniformity in portfolio performance. 

FMPP, a highly lucrative investment avenue

P2P investment offers returns higher than many traditional, mediator-heavy investment avenues, particularly due to its aggregator model. FMPP, with its added dimension of risk protection, offers returns that are both high and . FMPP has been devised to give Marginalised NPA and and returns of up to 10 to 12% p.a.* One can opt for it to have a diverse portfolio. Alternatively, it can be a one-size-fits-all investment solution. One can start as low as ₹10,000.

P2P investment is part of the digitalisation trend, and being part of the FinTech revolution, the investment process is fully digital.  FMPP works on a robust algorithm: the borrowers are on-boarded on the platform having passed through two checkpoints; the funds are allocated to them; the repayments are taken from them; etc in a completely digital manner. Hence, unlike other P2P plans, investing in FMPP does not require tedious tasks of manual selection of borrowers and allocation of funds either. Hence, FMPP offers great investment opportunities in india. 

Conclusion

FMPP, a form of smart investment, offers returns of up to 10 to 12% p.a.*, higher than many traditional fixed-income asset classes and is a means of safe investments with high returns in India. LenDenClub has an added dimension of risk protection for meeting the returns proposition. LenDenClub owes this all to the hyper-diversification principle of FMPP, which, coupled with the robust AI- and ML-enabled platform, offers worry-free investment experience. 

*P2P investment is subject to risks. And investment decisions taken by a lender on the basis of this information are at the discretion of the lender, and LenDenClub does not guarantee that the loan amount will be recovered from the borrower.

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