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With RBI just passing the final guidelines regulating Peer to Peer lending in India, the idea that lending can be a mainstream investment avenue for both retail and HNI investors is gaining traction. When it comes to investments like P2P lending, which entails direct lending exposure in consumer loans, investors normally look for higher risk adjusted returns, flexible terms, low volatility and safety.
In today’s environment where fixed income instruments like fixed deposit are providing historically low returns, P2P lending can be a useful avenue for investors to enhance their overall portfolio with a new asset class which provides both high yield and regular income.
So, here are a few reasons why investors should consider add P2P lending to their investment portfolio:
Portfolio diversification: The first and most important reason why investors consider peer to peer lending as an investment option is to diversify their portfolio.
Every investor knows that a good portfolio is one that is diversified across various investment avenues. P2P lending offers investors a lucrative portfolio diversification option that goes beyond traditional investment choices such as stocks, bonds and other savings instruments.
In P2P lending, investors are lending to individual borrowers who are pre-screened by the P2P platform. Since returns in P2P lending are not correlated to market volatility – it provides extra cushion to the investor’s portfolio while enhancing overall portfolio returns.
Better returns on investment: Normally, when one thinks of peer-to-peer lending we think of it through the shoes of the borrower as it offers a fast, easy and convenient way to borrow money. However, for investors, peer-to-peer lending is a good option too as it gives a consistently high return on investment.
Today, on Monexo, investors are earning a rewarding gross annualized yield of close to 18% p.a. This is much higher than interest income earned on most traditional forms of investment. In fact peer-to-peer loans garner average interest rates of over 2x-3x higher when compared to savings bank accounts or fixed deposit earnings.
Safety: Like other investment avenues (MFs, bonds, equity etc.) – though P2P lending also involves risks - contrary to notional beliefs, P2P investments are actually safer than they are perceived to be. With P2P lending , the biggest fear in the mind of the investor is the possibility of the borrower defaulting on the repayment of the loan. To mitigate this risk, there are systems in place to make P2P lending safe for the investor. In P2P lending, loans are only given to borrowers after thorough checks are carried out to ensure that the borrowers have a good credit score. At Monexo, partnership with leading credit bureaus such as CIBIL ensures that borrower’s credit data and loan history is analysed real time. Legally binding loan agreements, NACH forms to auto—debit borrower’s bank account monthly are also executed between the borrower and the lender through the P2P platform.
In addition, in P2P lending investors can diversify their lending portfolio by lending small amounts of money across multiple borrowers. For eg, with an INR 1 lakh investment on Monexo, the investor can actually fund 100 different loans by lending as low as INR 1000/- per loan. This process of diversification ensures that risk is automatically mitigated. P2P platforms like Monexo also offer specialized insurance cover schemes to protect the investor’s portfolio from events such as borrower’s accidental death etc.
Regular monthly income: Another unique aspect of P2P lending is that it has the ability to provide steady monthly cashflow for the investor. In a P2P investment, the interest rate for the borrower is fixed. The principal is normally repaid by the borrower on a monthly cycle in the form of EMIs to the investor. This is convenient for investors as well as the borrowers. Investors have the option to either reinvest their monthly EMIs to further compound returns or can also withdraw their monthly EMIs to their bank account. Hence, in P2P lending, investors are able to avail of high and regular returns through peer-to-peer lending without having to deal with waiting for quarterly interest payouts or varying dividend payouts from equity investments.
Flexible investment option: Another significant advantage of P2P lending is that the investor gets the option to choose the borrower and is always in full control of his lending decisions. This makes P2P lending a personalized and popular mode of investing. The term of a peer-to-peer loan with Monexo can range from 6 months to 36 months. This flexibility enables investors to time their investments in such a way as to suit their investment and liquidity needs.