Does 8 to 12% interest returns on lending excite you? P2P lending platforms are offering good returns. But should you invest in them? Let’s discuss this.
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Buckle up, here we go!
In an earlier post, we discussed what is P2P lending and how it works. We understood how it is similar to the lending process of banks. Except you decide to whom to lend your money directly. And you receive higher interest as it poses a higher risk.
The question is whether you should invest in these platforms.
And to decide that, first, you need to know that P2P lending falls under Alternative Investments.
In simple terms, alternative investments are financial assets that do not fall into the traditional categories of stocks, bonds, and cash. These types of investments are often considered to be less mainstream and can include a wide variety of asset classes, such as art, precious metals, hedge funds, and private equity.
Alternative investments also tend to be more complex and may involve a higher level of risk compared to traditional investments.
People choose to invest in alternative assets to diversify their investment portfolio and potentially increase the overall return on their investments.
Now, P2P lending as an alternative investment hasn’t been around in India for a long time. So we don’t have much history to analyse the performance through different economic cycles.
But on average until now, customer reviews have been good. Most customers are able to invest and withdraw their funds with ease. As it is in the early stages, platforms offer more convenience at a low cost to attract more customers.
And if you are looking to invest in these platforms, first, you need to look at the charges and returns. Then look at whether it makes sense to invest in them based on your risk appetite, financial goals and other financial conditions.
Charges and returns for investors in P2P lending platforms?
As an investor (lender), some platforms charge joining fees, and some don’t. Most charge an investment fee of 1-3% of the invested amount, which can be deducted from the first EMI you receive as a lender.
Directly or indirectly, you pay a management/performance fee of 1-3% when you use their automated lending facility. You need to analyse each platform separately, as they all have different charges.
On average, you can expect an interest return between 8 to 12% from these platforms. Remember, these returns are not guaranteed.
Platforms like Cred and 12% Club have partnered with P2P NBFCs to offer P2P lending services. And to attract more investors directly to their platform, they offer more convenience and better returns than P2P NBFC Firms. They also absorb some cost, so you might consider investing in Cred and 12% club than investing in NBFCs directly.
Also, as a lender, you should know to whom you are lending. What kind of borrowers do these P2P lending platforms attract? We will discuss more on P2P borrowers in a future newsletter.
After knowing about the charges and returns, it is necessary to analyse your risk appetite, financial goals, portfolio, etc.
When should you avoid investing in P2P lending platforms?
As we informed you that P2P lending comes under alternative investments. It is, first, important to cover your basic traditional investments.
Basics include building an emergency fund and buying life and health insurance. Planning your financial goals and investing towards them through equity and debt investments.
You shouldn’t invest in P2P lending before achieving good exposure to traditional equity and debt based on your risk appetite, goals, and overall financial situation.
Also, many people make the mistake of investing their emergency funds in these P2P platforms as they offer better returns than a savings account and debt mutual funds.
It is a huge mistake because you are taking a higher risk, as these platforms are less regulated than savings accounts and debt mutual funds. Just because these P2P platforms have been able to generate good returns for the past few years doesn’t guarantee their future performance.
Imagine, after a year, suddenly, a new pandemic arrives, and you lose your job. When you try to withdraw your emergency fund from these P2P platforms, you find out that because of the pandemic, their NPAs are high and they have restricted withdrawals. You stand to lose more money as borrowers default.
It is highly risky to invest your emergency fund on these platforms. Also, don’t forget that emergency funds are not supposed to generate higher returns or build wealth for you. Keep them safe.
Learn more about how to park your emergency fund smartly here.
When should you invest in P2P lending platforms?
If you are at a point where you have covered all your basic investments and have more money to take more risks and try different investments, then yes, you can invest in P2P lending.
Or, you can include P2P lending investments under your debt investments in your portfolio. But remember that P2P lending investments have a higher risk than debt funds.
Also, you can’t claim any tax exemption or deduction on your investments in P2P lending. So, think carefully about it. Is it worth generating additional returns with higher risk while losing all the tax benefits you could get in debt funds?
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