Peer-to-peer lending, or more popularly known as P2P lending, is the online financial framework that connects lenders and borrowers on an online platform without a bank acting as the third party. This lack of intermediaries, and subsequently the lower costs involved, make P2P lending an attractive investment opportunity.
Lenders get a higher interest rate than other conventional modes of investment and borrowers can get loans without the myriad of paperwork and collaterals usually required. Even though the online portal usually charges a fee, it is quite nominal and is worth the service they provide in return. Here are some helpful tips to get started with investing in P2P lending.
Start
Now is as good a time as any to get started with P2P lending. In September 2017, RBI issued a notification, passing a mandate for all P2P lending platforms to be registered as non-banking financial companies (NBFCs) and published a set of guidelines for P2P lending platforms. In May 2018, Faircent.com became the first platform to receive the certificate of registration as an NBFC-P2P from the RBI. Since then approx. 12 more platforms have registered. The global P2P lending industry valued at $3.5 billion-global in 2013 and at $64 billion in 2015 is expected to be worth nearly $1 trillion by 2050. The Indian P2P lending market size is expected to be $ 4-5 billion by 2023. P2P lending is here to stay, and the sooner you start investing in this asset-class faster you earn on your surplus funds.
Build
Build a diversified portfolio of investments over some time. This effectively means that you should invest in smaller loan amounts spread across a large number of borrowers. This will allow you the leverage to absorb any sudden shock arriving from someone defaulting on a loan. Diversification of your investment not only entails different borrowers but also means that your borrowers should have different profiles, credit scores, requirements, ability to pay back the loan, among others. Hence small amounts must be spread across a large number of loans to borrowers from different gender, location, risk-buckets, occupation etc. Faircent.com is India’s largest NBFC-P2P with more than 7 lacs registered borrowers providing a wide variety of choice.
Invest & Stay Invested:
It is better to invest your money instead of keeping it idle. Idle money does not generate any revenue, and you have an array of asset-classes to choose from. P2P lending is delivering higher and stable returns when compared to stocks and MFs and should be considered as part of your investment portfolio. Start with 50k to 2 lacs depending on your risk appetite and steadily build your portfolio. A long-term investment plan of at least 24 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.
Re-invest:
One of the most significant advantages of P2P lending is that investors start earning from the next month itself, making it possible for them to roll their profits back on the platform for further reinvestment. This ensures a compounding return on investment, making it a very lucrative option for investors. Make sure you reinvest your returns, at least partially, to maximise your return on investment. Faircent.com research data shows that lenders who reinvest are earning higher net returns by up to 10% p.a. Further, since principal invested comes back every month as part of the EMI, Net annualized Return (NAR), over a period of time becomes constant or starts to drop. Reinvesting the monthly EMI ensures that NAR remains high.
Factor-in:
All borrowers are listed on Faircent.com across various risk buckets from low to high risk depending on their credit evaluation by the under-writing algorithm. Low risk will ensure that your money is borrowed faster but will ideally come with a much lower return on investment than a high-risk loan. A good mix of all categories is the right approach. Platform transparently displays the default rate for each category. Keep the predicted default rate for each risk-bucket in mind while calculating the return on your investment to set the right expectations and protect yourself from some unknown shocks later.
Track and Correct:
A fair collection of reports, data-analytics and tools are available on your Faircent.com dashboard to track your portfolio performance. This will help you keep a birds eye view on the NAR or Net Annualised Returns, (a way to measure the returns of a fixed income portfolio) and on the EMIs you are getting on your investments;along with additional metrics like temporal and distributional data, portfolio comparison with platform performance, wealth enhancement tools etc that help earn higher returns and undertake any course correction needed in order to maintain high NAR from your investments on the platform.
Visit www.faircent.com to know more
