How To Build A Diversified Portfolio Through Peer To Peer Lending In India?

Nov 5, 2020

As an investor, are you always looking for high-return investments that are convenient and hassle-free? If yes, have you tried investing in Peer To Peer Lending?  

Peer-to-peer lending, or more popularly known as P2P lending, is the financial framework that connects lenders and borrowers on an online platform without banks acting as the third party. This reduces commission contribution to intermediaries and reduces costs involved, helping investors earn higher returns, making P2P lending an attractive investment opportunity.

The Indian P2P lending market size is expected to be worth 10 billion by 2025. P2P lending is here to stay, and the sooner you start investing in this asset-class, the faster you earn on your surplus funds.

Here are some useful tips to start building a better portfolio – 

1. Diversify

Diversification of your funds into small value investments among many borrowers is default risk mitigation in peer-to-peer lending.

 

Optimal diversification can vastly improve the performance of your P2P investments. As a widely accepted practice, investors diversify their investment portfolio across various investment options to ensure that the collective performance of the portfolio sufficiently eclipses the losses of individual instruments. A similar principle is applied to P2P lending as well.

For instance – The performance of an investment amount of Rs. Fifty lakhs divided into 100 borrowers (Rs. 50,000 each) could be majorly affected by even one default. Whereas, if a similar amount is split between 10,000 borrowers (Rs. 500 each), the risk is further divided and minimises the effect of default on the collective returns of your portfolio. Optimal diversification ensures high returns and lowers risk.

 

2. Automate Investments

 

Several P2P lending platforms such as LenDenClub offer automated investment services. If you are an individual or an institutional investor with a significant investment amount to disburse, you can use automated investment. Instead of manually looking for each loan or borrower profile, you can save time by adding filters according to the profiles you want to invest in and letting the machine learning automatically invest for you across loan profiles. It also makes it easier to manage an account with multiple borrowers where huge investments are optimised and taken care of.

 

3. Stay Invested 

 

Most P2P investors make the mistake of withdrawing the interest return or principal repayment EMIs at regular intervals, monthly or quarterly in most cases. However, it is advisable to stay invested for a longer period and re-invest the cash flow. This will fetch you more money through the power of compounding, where the principal amount keeps building with each reinvestment.

 

Now is a good time for anyone to get started with P2P lending and build a diverse portfolio.

 

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