Is P2P Lending a Good Investment Than Other Investment Assets?
Aug 01,2019 Investing, Peer to Peer Lending, Investment
P2P lending platforms are called "peer to peer lending" because they bring individuals / peers - together to participate in two sides of the same transaction. While borrowers turn to P2P lending in order to apply for a loan, investors show up in order to secure higher returns on their investment capital.
Peer to peer lending in India is a newly emerging investment concept. It is often compared to savings, fixed deposits, real estate, stocks & gold that has been the traditional investment options in India. With the rapid advancements in financial technology, P2P Lending has emerged as high return alternative asset class which has started changing the Indian investment landscape with the product structure that fits in line with expectation of Indian masses.
Savings Accounts and Fixed Deposits
While savings account provides 3-5% annual returns, fixed deposits yield 6-8% returns. Both these options are good for parking funds for short term requirements or to keep money for emergency. Keeping fund in cash accounts over the medium or longer term does not help in building substantial wealth.
Buying your own home
Everyone dreams about a house of his own where he can dwell in peace and happiness with his family. Investing in real estate can generate a return in two ways: earn through rent or capital appreciation of property.
For past 3-4 years, this sector is facing prolong slowdown as there is substantial unsold housing stock across property markets. Further the requirement of initial capital, lack of liquidity & longer tenure of investment (05 to 10 years) to get returns act as key negatives for this asset class.
Stocks and Mutual Funds
Investors can either own shares directly or invest collectively with other investors in a mutual fund. Investors with shares become shareholders in the company and benefit from the profits of the company that it makes known as dividend and from rise in price value of shares.
Investing in shares carries risks. The value of the investment can fall if the share price falls, either due to economic conditions or the poor financial performance of the company. Both Equities and Mutual Funds investment require market knowledge. Equity offers better chances of beating inflation over the long term & build wealth, therefore preferred by financial savvy people.
Gold has been one of the favourable options of investments in most household for generations, specially by Indian women. However in real terms, there are multiple costs attached to Gold prices for e.g. storage costs, making charges, mark up costs in purchasing and selling. For centuries gold has been used as one of investment options to hedge against inflation.
Peer to Peer Lending (P2P)
Since there is generally no middleman involved in P2P transactions, return is higher. Meanwhile, interest rates available to borrowers are often competitive than rates offered by traditional banks .
In September 2017, RBI issued a notification, passing a mandate for all P2P lending platforms to be registered as non-banking financial companies (NBFC- P2P) and published a set of guidelines for P2P lending platforms. OMLP2P.com, first to make application to Reserve Bank of India for allotment of CoR, has received the certificate of registration as an NBFC-P2P from the RBI in June 2018. The Indian P2P lending market size is expected to be $5-10 billion by 2025.
Investor are always suggested to create a loan basket of 20-50 loans, spread across all the risk categories from B1 to B5 and P1 to P5, so that they can expect to get higher return on their investment while managing their risk suitably.
One unique feature of P2P investments on OMLP2P is that investor can start with as low as INR 2,000. Investor can increase their investments depending on risk appetite to steadily build P2P lending portfolio. A long-term investment plan of at least 18 to 36 months is the best way to get good returns with P2P lending as the returns compound with time, increasing the return on investment. In other words, investor will earn most of their interest upfront, while receiving most of the principal back towards the end of the loan's term.
Investing through a P2P platform can work well for those who understand the risks involved in it. With that being said, one should use P2P investments to supplement the fixed income portion of his overall investment portfolio.