Although peer to peer(P2P) lending has been around for quite some time, it has seen a wide range of investor returns especially during turbulent times. Successful investors have earned over 20% but things doesn't always go well that's why it's better to systematically adjust associated risks instead of investing on instincts and luck.
How does an investor ensure that his return falls at least between the adequate average? This article dives deep into P2P investment and the strategies one can adopt to build a solid portfolio with P2P lending.
How Does Peer to Peer Lending Work?
In simple words, with peer to peer lending, an investor lend money to multiple borrowers and get repaid with additional interest while Lendbox serves as an online investment platform that connects borrowers seeking a personal loan with the willing investors without the involvement of a third party. Sounds pretty straightforward? Well, there's much more to it.
P2P financial framework is a convenient replacement for the lending services traditionally offered by banks or other institutions as it cuts out the middlemen. This effective lending arrangement benefits both parties as it offers cheaper loans to borrowers and competitive rates to investors.
The peer to peer platform checks the creditworthiness of the borrower to ensure security of the investor’s funds. Several platforms also permit lenders to choose their borrowers, giving them power to control the risk that is taken. In a P2P financial transaction, the borrower pays back the loan with interest which becomes the profit for the lender.
Lendbox along with traditional P2P lending also have multiple other products where even principal is protected to help investor looking for truly low risk investment options help them diversify their investments even better.
The lender can then decide whether he wishes to withdraw the returns or re-invest them to maximize returns.
How to Invest in P2P Lending?
The steps to invest in P2P lending are:
- Register as an investor on the desired lending platform
- Transfer funds to it and check your escrow account
- Choose the borrowers according to your risk appetite and desired ROI
- The lending platform will disburse the funds to the borrower
- Later, it will collect the payments and distribute it to the lenders with interest
Why One Must Go For P2P Lending In India?
There is no better time than now for investors to begin with P2P lending. RBI issued a notification in 2017 mandating all P2P lending platforms to register as NBFCs (non-banking financial companies).
By 2018, several P2P platforms were registered as NBFCs. The P2P lending industry was valued at $3.5 billion globally in 2013, $64 billion in 2015 and and is expected to hit $1 trillion by 2050.
The market size of P2P lending is expected to reach $5 billion by 2023 making it an ideal investment choice in the foreseeable future.
Tips to build a Solid Portfolio with P2P Lending
P2P lending brings to the investors higher rates of interest than many other investment mode. Given below are key strategies to build a solid portfolio with P2P lending:
Diversification is the key to smart P2P lending. The opportunity for a good return will be limited if the investor doesn’t diversify. With diversification, the damage caused due to defaults can be minimized.
Small loan amounts must be spread across a large number of borrowers with varying demographics, gender, location, occupation and risk appetite. P2P investment diversification involves various borrowers with varying profiles, credit profiles, repayment ability offering a myriad of choice.
Invest slowly and carefully
Slow and steady investment works best for P2P lending. The ideal approach will be to invest a certain percentage of the investor’s portfolio in every loan, and then subsequently invest more when more loans become available. This process ensures investment of all the funds within a few weeks and holding a high performing portfolio.
Choose Loans Carefully
There are hundreds of loans to invest in P2P lending and it may be a daunting task to choose from them. The investor must analyze the loans individually and narrow them down based on various criteria. Filtering and choosing the loans helps to know the details of the individual borrower. The investor can also ask questions to the borrower and make an informed decision.
Go for long term loans
Most long-term loans offer a boost of 2% to 3% boost in the interest rates. Even if there are defaults, they will occur early in the loan life cycle offering some wiggle room with the high interest rate.
If one chooses his loans carefully, he can limit the number of defaults and the risk if longer duration is worth it because of the good interest rates. An investment plan for 2 to 3 years is ideal to receive reasonable returns from P2P lending as returns compound over time, boosting the ROI.
It is never a good idea to keep money idle if one wants to grow his portfolio. P2P lending delivers high and stable returns in comparison to mutual funds, or stocks. The investor can begin with any amount starting from Rs. 50,000 and steadily go up to 2 lakhs depending on his risk appetite.
One of the notable advantages of P2P lending is the quick earning by the investors making it feasible for them to roll over the profits back into the lending platform for re-investment.
Through this they can leverage the compounded returns on investment making the venture lucrative. The investors must at least partially invest the returns to maximize their ROI.
The Final Word
Several investors are drawn to P2P lending due to the attractive returns but only a few take the time and effort to understand how to maximize the returns from their P2P lending. By adopting a few vital strategies to building a P2P lending portfolio, the investment can turn out highly profitable earning above average returns.
Lendbox, which is one of the leading P2P lending platforms in India offers a secure, seamless and rewarding platform to generate a regular income stream. All savings are directly diverted to the investors at high returns without any intermediaries. Get a customized investment plan from experienced wealth managers and invest only after satisfaction. Click here to sign up!