Why Indians Should Invest in Peer-to-Peer Lending
One of the most distinct benefits of investing in P2P loans is that it offers steady and quick returns to investors with both low and high risk appetites.
Photo Credit : theasianbanker.com,
Mutual funds, fixed deposits, stocks, or real estate? Till a few years ago, these were the limited options available to people looking to invest their money. However, over the years, returns from most market-linked investments have proved to be unpredictable.
In such a market scenario, online peer-to-peer (P2P) lending has emerged as a new multi-billion-dollar asset class for people and institutions around the world. Some of the world’s major economies such as the US, the UK, Canada, France, Germany, and China have seen the rise of online P2P lending companies on a massive scale. Prompted by the growing popularity and influence of this sector on the overall market, these countries have regulated online lending to make it a mainstream financial and investment product. With the Reserve Bank of India set to announce guidelines to regulate online P2P lending, India will become the latest country to officially recognise this fintech innovation and it’s impact.
Online peer-to-peer lending as a prospective investment class offers many unique propositions.
Net Returns and Interest Yields
While savings accounts or fixed deposits usually yield interest rates of 6% to 8% on average, Mutual funds on the other hand, offer returns averaging at 9% to 13%, with some funds yielding up to 15% p.a. Compare this to online P2P loans, which can generate average net returns of 18% to 22% p.a for lenders.
No Lock-in period, enjoy benefits of compounding interest
Since the entire P2P lending process from loan application to disbursal of money is carried online, it significantly lowers the operational costs, thus enabling higher returns for lenders and affordable interest rates for borrowers. Unlike many high-yield mutual funds, which have a lock-in period of a minimum 3 years, lenders investing in online P2P loans start receiving interest income as well as the principal from the very next month. Moreover, with a month-on-month return, lenders can reinvest their income in additional loans and earn higher, compounded returns.
As with any debt-based investment, there is a risk of default in online P2P lending as well. But since the premise on which P2P lending is based is similar to that of debt instruments, the capital risk is lower, and there are ways to mitigate it. One of these is diversification. Diversifying your portfolio by investing across different types of loan and borrower categories helps mitigate risks to ensure a steady flow of returns. Borrowers on online P2P lending platforms are listed according to yield and risk categories such as low, medium, high, and very high. Lenders can ensure consistent returns and profits by creating a portfolio comprising a range of categories, much like they would in the equity market or in mutual funds. Smart investments are the key to truly reaping the benefits of online P2P lending. By maintaining a balanced ratio of traditional and alternative investments like P2P lending, individual investors can ensure high profits over a long term.
One of the most distinct benefits of investing in P2P loans is that it offers steady and quick returns to investors with both low and high risk appetites. In a traditionally conservative investor community, like that of India, online P2P lending presents a profitable investment opportunity that offers higher gains at relatively lower risk.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house
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