How To Build A Diversified Portfolio Through Peer To Peer Lending In India?
Being an investor, are you the one who is always keenly looking for high returns on your invested money. If yes! Have you tried investing in Peer To Peer Lending?
Peer-to-peer lending, or more popularly known as P2P lending, is the online financial framework that connects lenders and borrowers on an online platform without a bank acting as the third party. This reduces commission contribution to intermediaries, and subsequently reduces costs involved, making P2P lending an attractive investment opportunity with investors earning a good percentage of returns.
The Indian P2P lending market size is expected to be Rs. 5,000 crores by 2023. P2P lending is here to stay, and the sooner you start investing in this asset-class faster you earn on your surplus funds.
Here are some useful tips to start building a better portfolio –
Diversification of invested amounts among many borrowers is default risk mitigation.
Optimal diversification can vastly improve the performance of your P2P investments. As a widely accepted practice, investors diversify their investment portfolio across various instruments 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. 50 lakhs divided into 100 borrowers (Rs. 50,000 each) could be majorly affected by even one default. Whereas, if a similar amount is divided between 2500 borrowers (Rs.2,000 each), a few numbers of defaults won’t affect the collective returns of your portfolio in a big way. Optimal diversification ensures high returns.
2. Automate Investments
Several P2P lending platforms such as LenDenClub offer automated investment service. If you are an individual or an institutional investor with a large investment amount to disburse, then you can use automated investment. Instead of manually looking over each loan or borrower profile, you can save time by applying automated filters and get a quick overview. It also makes it easier to manage the account with multiple borrowers and huge investments to take 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 the majority of 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.
Now is a good time for anyone to get started with P2P lending and build a diverse portfolio.