The dawn of the 21st century saw the rise and phenomenal growth of digitization in our lives. With social media, many traditional pipeline models were disrupted and platform models took their place instead. Today, anyone can upload a video to YouTube or publish and online blog and earn revenue. The sharing economy, as we know it, has democratized the world. This sharing economy stemmed from the fact that acquisition and/or sharing access to goods or services was done through peer-based online platforms. Eventually, the financial services realized the potential of this economy and fintechs started evolving. By offering financial services as an end-to-end process via the internet, soon many traditional financial services were being approached with a new perspective – Peer to Peer Services.
What Does 2018 Have in Store for Investors?
During the last 8-10 years, there has been a huge shift in the way people consume products and services. Look around you. Most purchases are being made online, book/movie reviews are checked in people-driven platforms, and even restaurants are selected based on reviews. People are leveraging technology in all aspects of their lives including financial products/ services.
While the traditional investment options like gold, real estate, bank deposits, bonds, stocks, mutual funds, etc. are still being preferred by most investors, alternative investment options like peer-to-peer lending and Cryptocurrencies are making their way into many investment portfolios too.
We believe that in 2018, investors must strive for a fine balance between traditional and alternative investment options.
What is Peer to Peer Lending?
Traditionally, banks accepted deposits from investors at pre-specified rates and offered loans to people at comparatively higher rates. Fintechs, in their attempt to democratize the lending-borrowing process, started peer-to-peer lending platforms allowing investors to directly lend funds to borrowers. There is no bank involved. Here is a quick look at the process:
Traditional Lending-Borrowing Cycle
P2P Lending Platforms
Features and Benefits of P2P Lending Investing
Most investment-gurus suggest investors to maintain a balanced portfolio. However, investors need to dedicate a lot of time to monitor and manage their investments. Further, investments like stocks and mutual funds, which offer good returns, carry market-related risks. These risks are beyond the control of an average investor. Debt instruments, on the other hand, are less risky but offer relatively lower returns.
The markets have been harboring a positive sentiment for the last few years, however, with volatility being inherent to the markets, predicting future performance can be tricky. Investing in peer to peer lending puts most of these worries to rest. Here are some benefits offered by p2p lending investing:
- When you invest through a p2p platform, you loan funds to a borrower at an agreed rate of interest. Therefore, your investments are not linked to the market-volatility.
- By investing in p2p lending, you can earn returns ranging from 11-30%.
- All your investments (high, medium, and low-risk) are on a single platform making managing them easy. Since the value of your investments does not change, you don’t need to monitor them regularly.
- In case of delays, most p2p platforms have a collection/recovery process in place.
- You have the option of multiple-level diversification to hedge the risk of default. For example, if you choose to lend funds to a high risk borrower, you can choose 10-20 such borrowers and divide your funds among them. This reduces the capital exposure to default risk.
You work hard for the money you earn and harder to save. Therefore, it is important that you choose an investment option that works equally hard and helps you achieve your financial goals. A small piece of advice – before you invest a sizeable amount of your portfolio in p2p lending, ensure that you understand it well. Start small and increase the investment amount as your comfort grows. Remember, diversification is one tool that can help you minimize the damage to your portfolio in the event of any delays or defaults. Create a balanced portfolio by diversifying your funds across different risk classes and multiple borrowers within the same risk class.
Since p2p loans offer cheaper and faster loans to prospective borrowers, every year an increasing number of people are turning to these platforms for loans. The future looks promising. 2018 seems like a good year to dip your toes into the p2p lending market, test the waters and prepare for the future. Good luck!